Get to grips with your profit

The Profit & Loss report (P&L) help us understand how efficiently a business converts its income into profits. A good approach to reading a P&L is to look at the Net Profit, Gross Profit, and then look through the income, direct costs and expenses to understand what is affecting your profit.

The Net Profit is usually the last line on the P&L and is the income left after deducting all direct costs and expenses. Direct costs are the costs incurred to make the product or service and usually includes materials and contractors. Expenses are typically the fixed or overhead costs incurred regardless of whether sales were made or not. Expenses could include advertising, rent, subscriptions and telephone costs. In our example P&L below, the Net Profit for June 2024 is a loss of ~$995 (Total Trading Income of $10,099 less Total Cost of Sales of $1,304 and less Total Operating Expenses of $9,791).

The Gross Profit is the income left after deducting the direct costs associating with generating that income. There should be enough Gross Profit to cover expenses. In our example P&L below, the Gross Profit for June 2024 is ~$8,795 (Total Trading Income of $10,099 less Total Cost of Sales of $1,304). This is not enough to cover the expenses of $9,791.

When we look at the income, costs and expenses for June 2024 we can see that 1) our Gross Profit was reduced due to purchases, and 2) we made a loss (negative Net Profit) due to high advertising and subscriptions expenses. This loss highlights the importance of comparing P&Ls from different accounting periods. Looking across multiple periods helps us to identify trends and assess how consistent the profits are and tells us that June is a bit of an outlier: we don’t make purchases every month, our advertising costs were higher than normal, and we don’t usually pay subscriptions.

If you found this exploration of the P&L helpful and would like us to look at your business’s profit, we’re offering our clients complimentary 20-minute meetings in August and September that you can book here: https://www.sutcliffegraham.nz/service/cashflow-profit-improvement-meeting

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