Understanding Profit & Loss

The objective of this course is to provide participants with an understanding of what a Profit & Loss statement is, why it is required and how to interpret it.

Income Statements

Financial Statements

The 3 Key Financial Statements

There are three (3) key financial statements used in businesses. This learning session will focus on the Income Statement, also known as the Profit & Loss (P&L) statement.

Purpose of the Income Statement

Income Statement Purpose

The purpose of the income statement is to provide the financial earnings performance of a company over a specific period of time.

Earnings includes the amount of income and the amount of expenditure.

Introduction to Income Statements

Terminology

Income Statement Format

All Income Statements will include three (3) elements: Income, Expenses and Profits...

Income Statement

1) Income

   - Sales

   - Cost of Good Sold (COGS)

Gross Profit

2) Expenses

   - Indirect Costs (e.g. Rent, Utilities, etc.)

3) Operating Profit


YEAR


$XXXX

$XXXX

$XXXX


$XXXX

$XXXX

Elements of an Income Statement

Sales

Also known as Revenue and Income, is the sum total of customer invoices raised in a specified period.

Customer invoices are generated following the selling of goods &/or services and completion of agreed milestones.

Cost of Goods Sold (COGS)

This is the sum of the direct costs incurred to produce/deliver a product &/or service.


Gross Profit

Gross profit = Sales - COGS

Elements of an Income Statement cont...

Expenses

Also known as Indirect Costs or Operating Costs, are the expenses required to operate the business including fixed and variable costs, such as office rent, utilities (i.e. electricity, water, gas, etc.), etc.

Elements of an Income Statement Cont...

Operating Profit

Sometimes referred to as Net Profit, is the Gross Profit minus Operating Costs, calculated before taxes.

How employees influence the Income Statement Results

Sales

Sales

Sales (Revenue/Income) is directly influenced by the flow of customer orders through a business.

It starts with the generation of customer orders by Sales & Marketing, and the converting of these customer orders into completed work by operations, which is then invoiced to the customer by the accounts team.

Operating Profit

Operating Profit

The operating profit is directly influenced by the amount of cost expended to generate sales.

This includes the cost to generate the sales, costs to fulfil the orders and costs to run the business.

How Sales and Operating Profit is Generated

What is the purpose of an Income Statement?

  • It tells us if a business has made or lost money during a specified period
  • It is a measure of the operating efficiency of a business
  • It is a measure of performance of a business against previous years/periods
  • All of the above

When is a Sales recorded as income on an Income Statement?

  • When a Customer Order in received
  • When a Supplier Invoice is received
  • When work is completed and a Customer Invoice is issued

What is the difference between Gross Profit and Operating Profit?

  • Gross Profit = Sales Income - Direct Costs
  • Operating Profit = Gross Profit - Expenses
  • All of the above

How can you influence the results on the Income Statement?

  • by helping to increase the number of Customer Orders won by the company
  • by helping to complete Customer Orders and milestones on time and to the desired quality standard
  • by ensuring Customer Invoices are issued on time
  • by minimising the time and costs expended to win and complete the Customer Orders
  • All of the above