Learning how to read a Profit and Loss Statement is one of the most important things you can do to gain better control of your business. This is one of the financial statements that is the scoreboard of your business.
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- 1 Learning how to read a Profit and Loss Statement is one of the most important things you can do to gain better control of your business. This is one of the financial statements that is the scoreboard of your business.
Imagine playing your favourite sport, but you can’t look at the scoreboard until the game is finished. You then found out that you actually lost the game. Well, looking at the scoreboard after the game is over is what so many small business owners do. They sit down in front of their accountant, and generally go straight to the bottom line to see if they made a profit or loss, and how much of a loss or profit.
Looking at the bottom line of the Profit and Loss Statement (P&L) is like looking at the balance of your bank account, without looking at the spending or the deposits of the account, that resulted in the balance.
In this part of How To Read a Profit and Loss Statement, we are going to focus on how Gross Profit is calculated, the importance of the Gross Profit percentage (GP%), and what it means to the overall health of your business.
We are going to break it down one step at a time. I’ve found that most people want to do the exciting things in running their business, and reading a profit and loss statement is one of the chores. But once you get to understand what you are reading and what a difference it will make in your business, it will move to one of the things you like to do.
What’s just as important, is this is a great tool to start planning your business. A business plan is also one of the chores that few business owners actually carry out. So once we’ve shown you how to read a profit and loss statement we’ll show you how to set up your budget for your business. That is when you start getting control of things and can really take your business to new heights.
This short video will explain how Gross Profit is calculated and the importance of understanding the Gross Profit percentage (GP%)
Most Profit and Loss Statements appear to be complicated by the uninitiated, and indeed they can at first appear to be quite daunting. But as we go though this series of understanding financial statements, you may like to keep in touch by subcribing to our blog.