Utilizing P&L Report for Growth
Most small business owners would agree that their Profit and Loss or P&L report is among the easiest financial documents to understand.
Two parts of your P&L report
The top half of the P&L report lists the income the business has received for the period covered. After subtracting the cost of producing your goods or services, it shows your gross profit.
The bottom half of the P&L lists all the expenses associated with running your business. When these expenses are subtracted from the gross profit the result is a net profit figure before tax.
Simple, right? But, wait, there is more.
Your P&L report can tell you how well your business is performing and how profitable your business is. There are two calculations that will give you two key performance indicators (KPIs) that offer important insights.
How is your business performing?
Your gross profit margin (GPM) is the gross profit as a percentage of sales and this KPI tells you how your business is performing.
To calculate, divide the gross profit by the total sales, then multiply by 100 to get the percentage.
Here’s an example:
Gross profit: $80,000 Sales: $400,000
GPM: 80,000 /400,000 = 0.2 x 100 = 20%
You can compare your gross margin to previous periods as well as with similar businesses. Regardless of whether the businesses you are comparing to are smaller or much larger, it’s the gross profit margin percentage that tells the performance story.
How profitable is your business?
Your net profit margin (NPM) reveals how profitable your business is when your overhead costs and expenses are deducted from the gross profit. It is calculated similarly to the GPM. Here is an example:
Net profit: $50,000 / Sales: 300,000
NP %: 50,000 divided by 300,000 = 0.166 x 100 = 17%
This KPI empowers you to spot trends in your business before they become disasters. If your net profit margin has fallen, you need to figure out why.
Reports in QuickBooks
Thankfully, QuickBooks has a standard report that will show both your GPM and NPM percentages in one. In QuickBooks Online, just go to Reports -> Business Overview -> Profit and Loss as % of Total Income.
Using the ‘Profit and Loss as a % of Total Income’ report you can compare your current period performance to a previous period, helping you to track trends.
Three Important P&L Report Tips
- Use your gross profit margins and net profit margins as benchmarks to set improvement goals.
- Review your P&L frequently, do not just look at your year-end numbers. You can’t effectively drive your business forward using a rear view mirror that reflects dated data – you need more up-to-date figures. Running P&L reports weekly, monthly, or quarterly enables you to take quick action to fix any negative trends before they do serious damage to your business.
- Remember to you can always get in touch with us to interpret trends in your results so you can take the right corrective action.