Monthly Archives: June 2016


How to Read your Profit and Loss (P&L) Statement

Profit and Loss

 

 

Any small business owner needs to understand at least the fundamentals of their finances, and although a Bookkeeper can be of great help, it is important that you understand what all of those oh so helpful reports are telling you.

 

Today, I’m going to go over the Profit and Loss (P&L) Statement, and how this can help you understand the state of your business.

 

The P&L Statement measures your income, costs and expenses over a set period of time (often a year, quarter, or month). Reviewing your P&L statement over the course of several months can give you a pretty good idea as to how your business is faring. It will also help you to identify (in real numbers) any seasonal patterns or trends.

 

Gross Earnings: The first line of the P&L is “Sales” (product sold) or “Revenue” (services rendered). This is the “top line”, and refers to the sum of all sales or revenue earned during the period. Depending on the detail of the report, you may find that this is broken down further into types of sales or revenue, depending on the variety of your sources of income.

 

From your total revenue, we need to subtract all of the costs to run your business, which will leave us with our “bottom line” or “Net Earnings”. There are several different kinds of costs that need to be accounted for to determine your net earnings.

 

Cost of Goods Sold (COGS): If you sell a product, you will have to first purchase the raw materials or prepared product for your inventory.

 

Depreciation: Investments that the company has made will lose value over time. For example, if you purchase a company car for $28,000, over the course of 5 years it may only be worth $6,000. This loss in value is calculated regularly to reflect the current estimated value of assets.

 

Operational Expenses: Operational expenses primarily reflect the cost of salaries for staff, debt, and regular bills. Essentially, the day to day cost of doing business.

 

Financial Costs: These are usually related to interest on loans, late payment fines, interest on credit cards, bank accounts, exchange costs/gains etc.

 

Extraordinary Costs/Gains: Sometimes, there are just strange, non-recurring costs or revenues that don’t really fit anywhere else. It’s a good idea to make sure that if there are any extraordinary costs or gains, you know where they came from.

 

Gross Profit: Revenue – COGS = Gross Profit   This numbers is helpful to know just how much money your company is bringing in every period. This is what you have to pay your bills.

 

Earnings before interest and tax (EBIT): Gross profit – Operational expenses = EBIT. This is a helpful performance indicator as to how your company is doing.

 

Net Earnings: Your “bottom line”. The end result of all Revenue – all Costs, including interest and tax. This is what your company really brought in during the period. Hopefully, this number is positive and meeting your goals. If not, you’re potentially in trouble, and need to find out how to either increase your revenues, or cut your costs. This value can either be retained within the company, or paid out to shareholders.

 

For small businesses, I recommend that the P&L report be reviewed regularly. As previously mentioned, it can help identify trends, seasonal patterns, as well as warn you of impending danger.   If you don’t already receive this report from your bookkeeper or accountant, I highly recommend that you ask them for it as part of your regular monthly financial reports, and of course, don’t be afraid to ask questions.


Benefits of Hiring a Bookkeeper for Small Wellness Business Owners

Benefits

 

 

Small business owners often feel the need to handle their entire business themselves. I get it, your business is your baby. But sometimes it is more beneficial to you to outsource some of those important tasks. Bookkeeping is one of those tasks. Here are some reasons you may want to consider contracting a virtual bookkeeper:

 

1. Specific Financial Knowledge

You have received training and been educated specifically for your profession: massage therapy, herbalism, psychology, yoga instruction etc. Even though you have a fair idea of your business’s finances, you likely lack the specific accounting knowledge required to classify all of your income and expenses accurately. This can have negative financial implications at tax time, and prevent you from truly having an accurate picture of how your business is doing.

 

2. Save Money

Keep track of bills and avoid overdue penalties. Identify areas where your expenses are outstripping your budget and find creative ways to minimize those expenses.  Tracking popular services and problem areas will allow you to capitalize on your strengths, and address weaknesses effectively.  Have all of your reports ready to go for your accountant at tax time.

 

3. Financial Reporting

Bookkeepers can provide you with customized reports illustrating the financial health of your business, and help to identify opportunities for improvement. These reports can also be prepared for your accountant come tax time to make filing simpler, and less expensive.

 

4. Budgeting and Benchmarking

Bookkeepers are experts at helping you develop and stick to an advantageous budget for your business. This helps keep your business practices in line with your goals. Compare your costs and services to other similar businesses to identify opportunities to maximize your income potential.

 

5. Time

Most importantly, hiring a bookkeeper frees up your time so that you can do the work you love to do. Time that you would normally spend doing the books on your own can be much more effectively spent on the real work of your business, while you have a trained expert efficiently handling the finances.

 

Hiring a professional bookkeeper can pay for itself, both in income/expense optimization and the freedom for you to focus on serving your clients.