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When you see my social media posts about "knowing your numbers" do you often wonder WTF are you talking about? What numbers? And how do I find them?

Arguably the most important number to know in your business is Profit. And how do you find out your Profit? By reading your Profit & Loss report. I know what you're thinking: What the heck is a Profit & Loss Report? And how the heck do I read it? 

This blog post is all about how to read a Profit & Loss report. Whether you are using a DIY Bookkeeping Template or reading a P&L sent by your bookkeeper, keep reading to learn all about this super important bookkeeping report. 

What is a Profit & Loss Report?

A Profit & Loss report (also known as an Income Statement or P&L) is a bookkeeping report that shows the income and expenses of a business in a certain time period. The P&L shows Income, Expenses, and Net Profit (or Net Loss). The P&L is used to understand where your money came from and where your money went. 

The basic equation of the P&L report is Income - Expenses = Net Profit (or Net Loss)

If Income exceeds Expenses, this report will show a Net Profit (positive amount). If Expenses exceed Income, this report will show a Net Loss (negative amount shown in parenthesis).

What is Income?

Income (also known as Sales or Revenue) is the money that a business makes from selling services or products. 

Income should be broken out into different categories called income streams. This shows the business owner how much money they are making from the different types of services or products they offer. 

For example, a therapist who has a private practice and coaches other therapists may have the following income streams on their P&L:  Private Practice Income, Public Speaking Income, 1:1 Coaching Income, Coaching Course Income. 

For a product-based business owner, it can be helpful to break out income based on the platforms they are selling on. They may have the following income streams on their P&L: Shopify Income, Faire Income, Etsy Income, Pop Up Shop Income, etc. This helps the business owner see which platforms to invest more resources in. 

Ask yourself these questions as you look at Income on the P&L:

• What were my highest income streams (i.e. income categories)?
• How did earning that income feel? (good, daunting, tedious, etc.)
• Did any income streams make a surprising amount of income in proportion to the effort or attention given?
• Should I focus more or less attention and effort on any income streams?

What are Expenses?

Expenses are the costs of running a business. There are two general types of expenses: Direct Costs and Operating Expenses.

Direct Costs are expenses that are directly related to the creation of income (products or services). Without a direct cost, there would be nothing to sell. For example, product inventory, raw materials used to create inventory, cost of labor for employees who are directly providing a service to customers, etc. Direct Costs are also referred to as Cost of Goods Sold.

Operating Expenses are expenses that are not directly related to the creation of income. For example, advertising, marketing, software subscriptions, utilities, etc. These are costs of running a business but are not directly associated with the product or service the business is selling. Operating Expenses are also referred to as Overhead Expenses or Indirect Costs.

Ask yourself these questions as you look at Expenses on the P&L:

• What were my highest expenses?
• Were any of these one-time expenses that I will benefit from over a long period of time?
• Am I using all of the expenses that I am paying for?
• Are there any that should be canceled due to non-use?

What is Net Profit (and Net Loss)?

Profit is arguably the most important number to look at in your business. It is the final number of the P&L report because the entire report is used to calculate Profit. 

On the P&L, if this amount is positive, it is a Net Profit (meaning income is higher than expenses). If this amount is a negative (shown in parenthesis), it is a Net Loss (meaning expenses are higher than income). 

Profit shows you the whole picture of how much money your business is making. Focusing on only income goals or looking only at your bank balance at a certain time is NOT looking at the whole picture. 

Many entrepreneurs talk on social media about their income or revenue without talking about their profit. If you made $10,000 in revenue this month, but you spent $8,000 in expenses to generate that revenue, then you only made $2,000 of Profit this month. Profit is the most important number in this equation. 

What is Profit Margin?

Profit Margin (also known as Profit %) is the percentage of Total Income that is kept as Profit. It is calculated as Net Profit / Total Income = Profit %. If your Profit Margin is 70%, it means that 70% of your Income turns into Profit and 30% of your Income goes towards Expenses. 

Research the average Profit Margin for your industry to see how you stack up against the competition. But more importantly, see how the Profit Margin of your business feels to you. If you’re in the growth phase of your business, still working on building your client roster, and investing in your business, a 30% Profit Margin might feel good to you right now. Others may feel more comfortable with a 50% or 80% Profit Margin. It all depends on what is happening in your business and in your life right now. 

The Importance of an Accurate P&L

Now that you're ready to read and understand a P&L report, let's talk about the importance of accurate data and an accurate P&L. 

Have you ever heard the term "garbage in, garbage out"? If you are paying for a QuickBooks subscription and not using it or you're not knowledgeable about how to do your own bookkeeping the right way, chances are, the data going into your P&L is garbage. Therefore, the P&L report itself will be garbage. It won't help you to know your numbers because the numbers are not accurate.

Accurately categorizing data, reconciling bank accounts so that you can confirm all transactions are accounted for, and knowing the nuances of different accounts are all part of having accurate books and accurate reports. 

If you don't have a background in accounting and are doing your own books in accounting software, it's time to consider hiring a bookkeeper. You can hire a bookkeeper to take over your books and do them for you, or for a review of your current books to ensure you are doing them correctly.

Either way, if you are doing your own books in accounting software, it's important to hire a professional to ensure that your P&L is accurate so you can rely on the report to make strategic business decisions. 

Examples of a Profit & Loss Report

In the DIY Bookkeeping Template, there is a dedicated tab for the Profit & Loss report. This tab shows all income & expenses for the business for the year with a column for each month of the year. 

My monthly bookkeeping clients receive two Profit & Loss reports in their Monthly Bookkeeping Reports file. The Profit & Loss for the current month and the Year-To-Date Profit & Loss which shows a column for each month of the year so far. 

Now that you know what a P&L is, how to read it, and the importance of an accurate report: go forth and read your P&L, understand what it is showing you about your business, and make strategic business decisions based on what you see. 

If you don't have a P&L report to read, that means it's time to purchase a DIY Bookkeeping Template or hire a bookkeeper. "Knowing your numbers" isn't just a thing I say, it's important and imperative to growing a successful business. It's time to know your profit so you can grow your profit!