Understanding Financial Statements - part 1

Understanding Financial Statements - part 1

Sunday, July 30, 2023

Do you know how to read your profit & loss report?

The Profit & Loss Report can be considered your Performance Report as it tells you the story of your income and expenses over a period of time – one year, or the financial year.

In general if your sales are greater than your expenses then you will have made a profit, and if your expenses are greater than your sales you will have made a loss.


Your income is the 'top line' of your Profit & Loss Report and comprises all money you earn through the general 'day-to-day' operation of your business - the sale of your products or services.

You may also receive 'other income' or 'non-operating income' which is outside of your normal operations, this could be interest from thebank or money from the sale of equipment as an example.

Cost Of Goods Sold (COGS)

Your cost of goods sold (also known as 'direct costs') are those expenses that are directly linked to the sale of your product or service. For example if you own a beauty salon then your COGS might include the products you use in your treatments or the wages you pay to your beauticians.

If you manufacture products then your COGS might include the raw materials/ingredients or packaging to make the product.

Gross Profit

Your gross profit is a simple equation of income less cost of goods sold, it is the money you have left after paying for the things you sold to your customers.

Your gross profit tells you how much money you made on your sales - the higher it is, the more money you have available to cover your operating expenses and the greater your chance of making a net profit.

Operating Expenses

Your operating expenses are the general expenses of running your business, the 'day-to-day' costs and ones that aren't tied up specifically in your products or service.

Examples might be office supplies, rent, salary you pay to a manager, general administrative expenses like accounting and legal.

You may also have 'other expenses' such as depreciation on equipment - these all come out of the gross profit you have available.

Operating Profit

Your operating profit is a simple equation of gross profit less operating expenses, it is the money you have left after paying for all of your business expenses but before you pay any income tax.

An operating profit shows that your business makes more money than it costs to run. Your operating profit less any non-operating expenses results in what is known as your 'earnings before tax'.

Non-Operating Expenses

Non-operating expenses are those expenses that you incur that aren't related to your main business activity and are usually one-off or unexpected.

You might sell equipment at a loss, incur unexpected legal fees, incur interest on loans from a bank etc. These expenses should be separated from your usual 'operating expenses' so your true business performance isn't distorted.

Net Profit

Net profit - the exciting number!

This is the money left over after all expenses and taxes are paid.

The net profit is often called the 'bottom line' because it is the last line in your Profit & Loss Report.

So what can you do with net profit? That all depends on your specific situation, but you may wish to pay down debt, outsource an area of your business to save time, reinvest it in your business or staff or pay yourself!

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