13 maart 2022
How to read a profit and loss statement?
What is a profit and loss statement?
If you're curious about how your business is doing, then a profit and loss statement is very useful. A profit and loss statement is an overview of all revenues and expenses over a certain period. You may also come across the terms income statement or operating statement for a profit and loss statement.
In a profit and loss statement, revenues are often listed under the account "sales" or "revenue". Expenses, on the other hand, are listed under many different accounts. As bookkeepers, we choose in which account to place a certain expense. For example, we deliberately choose to create a separate account for "telephone expenses", instead of placing it under "office expenses". This way, we immediately notice if telephone expenses are missing for a particular month.
What should I look for when I receive a profit and loss statement from my bookkeeper?
At first glance, a profit and loss statement may look like a complex table. However, if you take a closer look it is not that difficult to understand. Usually, it is useful to look for things that stand out. For example, if you notice that you haven't made any sales in the month of June, that's odd. You could then check if you have forgotten to send out any invoices. It's also noticeable if you pay rent of 400 euros every month, but suddenly see a charge of 500 euros for rent in April. Other things that might catch your attention are very high or negative amounts. By looking at these standout numbers, you can quickly see whether you forgot to pay an invoice or whether your bookkeeper made a mistake in the administration.
Note that a profit and loss statement often uses positive amounts for expenses and negative amounts for revenues. Therefore, a negative total amount is a profit. This can be confusing.
It's also useful to look at the total revenues, expenses, and profit. Does it match what you had in mind? Or how did you end up with a loss? What were your high costs for that month? You could then look at which expenses you can reduce. It's especially important to be critical of the profit and loss statement for yourself. A profit and loss statement gives you a lot of insight into how your business is doing.