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P&L: What is it and why do I need one?

This bloody acronym is one of the reasons that Holly & Co, even exists. The need for people to ask a small business if they have one of these – is almost like a ‘tick’ for people in suits. But enough of the moaning, we will tackle this more and more, as the months pass here at H&Co!

P&L stands for ‘Profit and Loss Statement’ and is a snapshot of a particular period of time of the income and expenses of a business. There you go – not that complicated or scary.

Actually to help us remember it more, let’s just say ‘Life is Peachy when you’re in profit and your face looks like it’s sucked a Lemon, when you’re making a loss.

It may show only high level details (say Sales, Gross Margin, Overheads and Net Profit) or might show much more detail, such as the types of costs included in your Overheads. A normal summary format might look like this, but one can expand these account headings as much as you want, depending on the detail you want to go into.

Sales:                       
  • Direct Costs              
Gross Margin        
Overheads:
  • People Costs            
  • Marketing Costs        
  • Admin Costs             
  • Finance Costs          
  • All other costs           
Total Overheads      
Profit/Net Margin     
  • Taxes                         
Net Income   

A P&L can be for a month, for a year or for a certain period within a trading year. It can be compared against a budget or against a previous trading period. A P&L is an essential financial tool that all businesses assessing their performance need. It not only reflects profitability, but as the name implies, reflects any losses the business might be making! Never! It is not just for accountants – it is information for the whole business to review and to react on. It is something we have to demystify, so that it becomes our friend.

Why do I need one?
  • To asses the performance of the business. Not just what you think is happening, the discipline of doing one, will tell you what is really happening.
  • To identify patterns of income and expenditure ie. sales in March and September are always low or control is needed for travelling expenses, as it seems out of control!
  • To budget or forecast future business performance, so you can try and understand your businesses rhythm.
  • To show the bank manager when you are looking for a loan/overdraft and he or she asks how is the business doing.
  • To look at ratios – ie Gross margin %, Overheads as % of Sales – are they improving, declining etc
  • If you are Limited Company you will need to have one prepared by your accountant for filing at Companies House, but depending on your size you may not have to put that information into the public domain.
  • Keeping you account books regularly up to date will allow you to monitor monthly, your profit and loss statement. Accounting software these days will provide P&Ls in the format your require


Lemon print by Old English Co

What a P&L is not!

A P&L statement is not the same as the Cash Income and Expenditure on the business’ bank statements, sometimes called Cash Flow.

In a P&L Sales will reflect what has been invoiced, not just what has been paid. Expenditure will reflect what has been invoiced by suppliers and not necessarily what has just been paid out.

Expenditure on what are called Fixed Assets – such as Machinery, Computers, Fixtures and Fittings etc are not included in the P&L, but these assets are Depreciated over their useful lives and that cost is included in the P&L over the number of years in question.

P&L’s will also include Accruals for costs that have not yet been invoiced, but relate to the time period in question and will exclude invoices for periods billed in advance (e.g quarterly rent) of the P&L period in question.

Profits or Losses Accumulate

Profits or Losses generated by a business, accumulate. In the case of profits they can be paid out as salary or just as drawings by a sole trader who will be assessed for income tax on that income or as salary or dividends if the business is registered as a Limited Company – again once company tax (called Corporation Tax) had been paid on those profits. What is left if anything is carried forward into the following year and can be taken as income as and when the business owner decides.

Losses accumulate as well and in the case of Limited Companies dividends can not be declared until all those losses have been extinguished by future profits! Get spraying that fire hydrant!

Useful Tips:
  • Get conversant with using spreadsheets! They are your friends and there are so many helpful tutorials, for free, online.
  • Remember Profit is not the same as Cash in the bank! You may be Profitable, but still find it hard to pay your bills.
  • Format your budget spreadsheet in the same format as the actual P&L results to make comparison easier.
  • Remember there will always be some sort of tax to pay on those profits – what is left after tax is for the business owner.

Don’t wait for the annual accounts to be prepared by your accountant – P&L’s are a financial tool for the business, not a legal requirement!

Just peachy pin by Megan McNulty


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