After posting about the 6 financial terms you need to know, I thought the next best thing would be give a good overview of how to read a profit and loss report. (Psst: a Profit and Loss Report is the exact same thing as an Income Statement. Two names for the same information. Because why would accountants make things easy???)
Profit and Loss Reports are what I send my clients every month, so they know how their business is doing. There’s SO MUCH INFORMATION packed into these reports, it’s great! Let’s jump in.
Here’s an example of a Profit and Loss Report (Quickbooks calls them Profit and Loss Reports. Xero goes with Income Statement.). Yup, this is my actual report as of this morning. Nothing like pulling back the curtain, right?
Let’s start at the beginning, shall we? (It’s a very good place, to start.)
Period / Time Frame
The first thing to look at is what dates the report includes. Most of the time you’ll be looking at a monthly, quarterly, or annual report. As I mentioned above, I send these to my clients every month. You’ll want to make sure you know what you’re looking at, because what might look like fabulous numbers could be misleading if you think you’re looking at a month’s worth of income, but really it’s an entire quarter (whomp whomp).
Income
The body of the report starts off with your income. All of it. Doesn’t matter if it’s from Etsy, group programs, 1:1 clients, affiliate income, or what have you. Any money coming into your business from products, services, affiliates, etc, counts as income. My income consists mainly of bookkeeping, but there’s a bit of Etsy income thrown in there (I designed a few cross stitch patterns back in the day), and a last bit of VA income from before I moved full time into bookkeeping. It all gets stuck under the main heading of “Income”. My income total income for this report was $10,383.
How detailed should you get in breaking out different types of income? That’s up to you, and I’ll go into more detail/ give suggestions on that in a later post! (Hint: breaking your income into several categories can really help you analyze your business and help you invest your time more wisely!)
Cost of Goods Sold
After your income comes "Cost of Goods Sold” (COGS). If you’re a jewelry designer this would be your raw materials. A designer might include the cost of fonts and graphics bought specifically for a client, and where the client keeps the licenses. A developer would include software licenses purchased and resold to clients. As a bookkeeper, I purchase Quickbooks and Xero subscriptions on behalf of my clients and pass the cost on to them, so this cost goes under Cost of Goods Sold. My COGS was $430.
Income - Cost of Goods Sold = Gross Profit
Right after the Cost of Good Sold comes a line for your Gross Profit. Gross Profit is your Income minus your COGS. It’s the amount of money you have left in the bank for the day-to-day expenses of running your business, and to pay yourself. (Yay for paying yourself!!) As you can see, my Gross Profit from January - April 23 was just under $10,000.
Expenses
The next big section of your Profit and Loss Report is expenses. It’s where you list all the mundane expenses that come with running a business. Website costs, PayPal fees, your ConvertKit subscription, the business conference you attended over the winter (and the plane ticket to get you there), and the marketing course you signed up for to help you rock Instagram. All of it gets listed here, in the Expenses section. Keeping this section organized and up-to-date will make tax season So. Much. Easier than you ever thought possible. So far this year I’ve had $628 in expenses. (I try to keep my expenses as low as humanly possible!!)
Gross Profit - Expenses = Operating (or Net) Income
This is the moment we’ve been waiting for, the number you really want to zero in on: your Operating Income. (Operating Income is the same as the Net Income I wrote about in the 6 Financial Terms post. Because again, why have one 1 term for a thing when you can have 2 or more!) This is the amount that you are clearing every month. The amount you can use to pay your self, take out of your business account and put into your personal account and then use it to buy groceries, pay rent, or go on a vacation. You know, the reasons you wanted to start a business in the first place!! My Net Income on this report is $9,325. It’s what I use to keep Spice the Pitbull in kibble and heartworm meds, and feed my sewing addiction. (And, you know, put food on the table. But truly, that’s the lowest of priorities!)
Other Income
The last little section that you might have on your report is “Other Income”. It’s where random little bits of income shows up that’s not really part of the day-to-day operations of your business. The whopping $0.56 that shows up on my report is interest income I earn from my bank. It’s technically income (and if I earn enough of it it’ll eventually flow through and show up on my taxes), but it’s not part of my business activity, so I don’t want to show it in the main report.
And that, my friends, is how you read a Profit and Loss Report. Hopefully it’s not as overwhelming or intimidating as it might have seemed 10 minutes ago. In future posts I’ll talk more about how detailed your categories should be, things that shouldn’t show up in these reports (Hint: sales tax and paying yourself!), and how to use these reports to help streamline your business and earn a bigger paycheck!
