Profit and loss statement: how much your business earns
Every businessman wants to know his profit and manage it. A tool called the income statement (OPI) helps to calculate it correctly. We tell you what it is, why it is needed, how it is arranged, how to conduct it and how to use it.
What is OPiU
The Profit and Loss Statement (OPI) is a table that reflects the revenue of a business and the expenses it incurred to earn it. The difference between them is profit or, if it has a negative value, loss.
To bake a meat pie, we need to buy flour, milk, eggs for the dough, meat and spices for the filling, rent a workshop, pay utilities, pay the baker’s salary, and so on. All of these are operating expenses that we must reflect in the P&I. The money that we receive from the sale of pies is also entered into the OPiU. Then subtract the costs and see what happens
The OP&L also reflects the key performance indicators of the business as a whole and its individual areas, if there are several of them.
Fragment of the income statement in Google Spreadsheets. Download template →
Profit and loss statement in the service “Fintablo”
How is OPiU arranged?
The top line of OPiU is revenue. This is the amount of fulfilled obligations to the client. We have completed the work – we recognize the revenue, and it does not matter whether the client transferred the money or not. Expenses are recognized taking into account the relationship with revenue. And then there is everything that we subtract from the proceeds.
The next block is direct variable costs. They can be accurately correlated with revenue. If there is no revenue, then there are no costs. Direct variable costs include the cost of production, transportation costs for the delivery of goods, and the like. Then we subtract direct variable costs from revenue and get an intermediate indicator called marginal income. It demonstrates how effectively sales work.
The next block is direct fixed (overhead) costs. These expenses appear with the advent of revenue, but do not grow with it. For example, the salary of production staff.
By subtracting the amount of direct fixed and variable costs or general production costs from the marginal income from the revenue, we get the gross profit. This indicator allows you to evaluate the effectiveness of projects or areas. If we have several areas or projects, comparing gross profit, we see which areas are more efficient, and which projects are more profitable.
Gross profit is followed by indirect costs. These costs are company-wide and cannot be attributed to a specific contract or product release. For example, office rent, software costs, internet.
We subtract from gross profit indirect expenses or the sum of all expenses from revenue, we get operating profit (EBITDA). This intermediate indicator allows you to evaluate business performance and compare companies within the industry. EBITDA demonstrates whether a business is capable of making money.
With the receipt of EBITDA, we are entering the home stretch. It remains to deduct taxes, interest on loans and depreciation from it in order to get the indicator for which we are conducting this report – net income.
Net profit is the final result of the company’s work. This money can be spent on business development, payment of dividends, creation and accumulation of a reserve fund, employee bonuses.
How to conduct OPiU
If a company has several lines of business, work with OP&S should begin with lines of business. Let’s imagine that we own a car wash, a car service, a gas station and an auto parts store. All of these are separate lines of business.
We figured out the directions – let’s move on to the items of income and expenses. For expenses, we must determine the type: direct constants, direct variables, indirect, and so on.
Directory of articles in OPiU
Information in the OPiU must be entered by months – before the 5th day of the next month. Income – with a “plus” sign, expenses – “minus”. If you work with VAT, income and expenses in OPiU are reflected without it. If you do not clear them from VAT, you will calculate the profit incorrectly, and maintaining OP&M will lose its meaning.
Why is OP needed?
The main question that the OP&M answers is what is the net profit of the business, how much did it earn. And the methodology on the basis of which it is compiled allows you to calculate it correctly. You need to know your profit in order not to pull too much out of the business and have a reason for analyzing what can be done if it is insufficient.
OPiU helps to calculate the margin, profitability, break-even point of the entire business and individual areas. These indicators are needed to manage profits.
Marginality is the ratio of profit and price. It shows the proportion of profit in revenue. The higher the margin percentage, the better. When the owner knows the margin, he has a reason to think about whether it can be increased and at what expense.
Calculating profitability and tracking it in dynamics helps to find out how efficiently a company is operating. If the profitability indicator decreases, it means that more expenses have become spent on the production of 1 ruble of revenue, and you need to figure out why this is happening.