A Profit & Loss statement is like a road map, read it upside down or back to front and you are not going to get to your desired location. The Profit and Loss statements needs to act as your road map. It needs to show your income earned and expenditure.
Use the KISS principal, (Keep It Simple Stupid) there is no need to get fancy. Use plain English and terms that you can understand. If your accountant calls it amortisation and that doesn’t make sense to you, then refer to it as a write off or something that you understand.
There is a difference between fancy and thorough. You need to be thorough so you can track each item and expense to measure your performance.
It is best, especially in the beginning and if using a program like MYOB to list each income and expense item into separate categories. Upon review you can then see where you are making your income and what your costs are.
This does not mean that you need to separate between mobile phone and business line, but you would differentiate between car insurance, office insurance and Workers Compensation for example.
You need to be able to review your P&L to track your progress. This will show you the amount of income and the different sources where you are earning income. It will help you identify areas that need more marketing or areas that are stronger than others. It could also tell you to dump some products and focus on others by determining what are the main key sellers.
Alternatively your expenditure will show you were your money is being spent. You should also have a budget or cash flow to work to, so you can tick off your forecasts against your original figures. Use the expenses to check that you are not going over your budgets for that item otherwise you start to dip into your profit.
Set-up your Chart of Accounts in alphabetical order to list each income and expense, it is much easier to follow. Always leave space between each item when setting up your chart of accounts. As you grow and setup new accounts you will need room alphabetically to insert these new accounts. If you haven’t left room then you will have to put it somewhere else, which will change your chart of accounts.
Create sub-headings that will total all expenses under that heading. For example, have a heading of Motor Vehicle and sub-headings of, Fuel, Registration & Insurance, Repairs and Maintenance, Tolls and Other. You can also do the same with Insurance for office insurance, Workers Compensation, Professional Indemnity & Public Liability.
This shows each items expenditure but sub totals that particular area, so you can determine your highest running expense including the fixed costs. This will be invaluable when trying to cut expenditure.
Always track your P&L (mind map) and never lose sight of your main targets.
Brad Callaughan is the founder of Callaughan Partners. Brad has built a very successful accounting and business advisory firm in a very short amount of time. He is now an expert in his industry contributing to many of the major business publications in Australian Media on various topics around finance and business.