What is a Profit and Loss Account?A profit and loss account details all income and expenditure in the business, from an accounting perspective. Therefore it doesn’t include capital expenses such as the cost of fixed assets, or your original investment. This report is usually prepared for a period of time, such as a specific month or a financial year, and it will show the net profit of your business at the bottom of the page (hence why it is referred to colloquially as the “bottom line”).
There are a number of “key performance indicators” that you should monitor within your profit and loss account, such as:
- Turnover – this is the value of sales (before VAT) during the period
- Gross Profit % – this is the profit that you make after deducting “direct costs” (costs attributable directly to sales, such as product purchases). It is this percentage that you should monitor carefully if you sell products or have any other costs closely tied to your sales, as a small change in the percentage can lead to a large change in your net profit.
- Overheads – these are displayed in the profit and loss account below the Gross Profit. Each business has different overheads that require monitoring.
- Net Profit – ultimately, this is the amount that the business is making, and your tax bill and the end company valuation will depend on the profitability of the business.
These KPI’s are the immediately obvious items that you need to monitor, however it is also important to acknowledge the KPI’s which affect these financial results. For example, if your business depends on telesales, then the number of calls made, and the conversion rates achieved, will directly affect the turnover, and in turn the net profit.