Previously, we took a detailed look at balance sheets and reviewed how to use the information they provide to make sound choices for your business. This week we’re examining another important financial document: the profit and loss statement.
Unlike a balance sheet that is a snapshot of your business at a set point in time, a profit and loss statement paints a picture of your business’s performance over a period of time. In this one report, you’ll see a summary of sales, costs and expenses for any time period you choose. Using Xero, you can run this report by month, quarter, year or even weekly if that’s helpful in your business model!
How is the data calculated?
The first section of your profit and loss statement will be your sales or turnover minus your direct costs. Direct costs are the raw materials, salaries or equipment used to directly create your product or service. The resulting amount is your gross profit.
From there, your overhead or indirect costs such as rent, advertising and administrative salaries are subtracted to calculate your operating profit, or profit before tax. Indirect costs are any expenses that support your business as a whole and cannot be directly attributed to what you sell.
Last, your tax payable is subtracted, and the number you’re left with is your net profit.
Sales – Direct Costs = Gross Profit