Decoding a Profit and Loss

Posted On Jun. 23, 2019

Decoding a Profit and Loss

A profit and loss statement is a very handy statement to look at for your business and seeing where your money within the business is going. It gives you a nice image of the net income of your business. It does this by calculating all the expenses that the business has incurred and subtracting this figure from the revenue that the business has brought in. By subtracting the expenses it gives you a clear indicator of the net income of the business.

With any accounting statement it does look a little confusing to start with. There are a lot of different headings and figures and it can be overwhelming. However once you understand the statement it will begin to look normal and easy to understand.

There are a few common terms that will show up on all profit and loss statements. Understanding these terms and knowing what each one means will help you to decipher the statement.

Revenue

Revenue covers not only income from the products or services you provide but it covers ALL money that comes into the business. This can include the sale of equipment or property that is in the name of the business. It can also include any refunds that you receive for your tax returns.

Expenditures

The final expenditures line is the total amount that is paid out in expenditures throughout the period. However this is broken up into different sections so that you can properly understand where your expenses are going.

COG

COG stands for cost of goods. This section is made up of the cost of the goods that you sell or provide. Selling something for X amount does not always mean that you make that amount. You need to factor in the costs in which are incurred to produce the product. These costs are allocated to the COG category.

Gross Margin

The gross margin is the amount that you get when you subtract the cost of goods from the revenue that you receive for the product. This gives you the amount that you make as a profit on each product. It is good to try and have a set mark up amount on your products to ensure that your gross margin is suitable and sustainable for those products.

OPEX

OPEX stands for operational expenditures. The operational expenditures for your business are all the other costs incurred by the business in the process of running the business and creating the products. These costs can include travel costs, equipment costs, wages, utilities, computer and software costs.

The list can become quite long depending on the nature of your business, however it is good to have each line separated so you can see exactly which of the operating costs are the highest and which ones you may be able to reduce in different ways.

Depreciation

Depreciation is the process in which different items reduce in their value. This covers a few different items including vehicles, technologic items such as computers and equipment. It is a good idea to track the depreciation of these items and then when they have lost their value it can be claimed at tax time.

EBT

EBT stands for Earnings Before Tax. The way in which this is calculated is by subtracting the COGs, OPEXs, interest and depreciation from your total revenue. Tracking the EBT is a great way to see the performance of the business.

Profit

Profit is classed as the bottom line of your business accounts. It shows the total amount of income that is in the business after all expenses have been subtracted from your revenue. The figure that shows is the amount of money that they business has actually made above what it has spent. Overall, seeing a profit is the goal for any business.

A simple way to think of the profit and loss statement is by thinking that it is a way to see your sales minus your expenses. Try to look at it as simply as possible and within no time you will be a whizz at the profit and loss statement.