By Tabitha Wellman, CEO, Innova Business

Completing your Profit & Loss is one of the most important steps in your business.  Often, you will know how much turnover you want, but you also need to know what it will cost you to generate that turnover.  Otherwise you could be going backwards without knowing it.

Having a Profit & Loss also means that when faced with business decisions, you can go back to your P&L and see if it makes financial sense to do so.  For example, you may have a huge amount of administrative work so one option would be to put on a new office administrator.  However, another option could be to streamline your workflow practices so that you can have a greater long term effect.  Do the costings for each option and enter it into your P&L to help you decide which option makes more sense.

Follow these steps to complete your Profit & Loss.

Download the Innova Business P&L spreadsheet.

1. Use this P&L template as your guide.  
2. Save it onto your computer so you can easily access it later.

Customising your template

• Enter the first month of the financial year

To automatically update the months in your spreadsheet, simply enter the month of your new financial year under ‘Fiscal Year begins’ (on the right hand side of your spreadsheet).  For example, if you are putting together a P&L for this next financial year, enter Jun-05.

• Under the income category, insert the types of products or services that you generate income from. 

• Under Cost of Goods Sold (COGS), enter the relevant categories. 

COGS are those expenses directly related to producing or buying your products or services. For example, purchases of inventory or raw materials, as well as the wages (and payroll taxes) of employees directly involved in producing your products/services. Control of COGS is the key to profitability for most businesses, so approach this part of your forecast with great care!  Underestimating COGS can lead to under pricing, which can destroy your ability to earn a profit.

• Gross Profit

By entering your Income and Cost of Goods Sold, the spreadsheet will give you your Gross Profit. 

Gross Profit is Total Sales minus Total COGS. In the "%" columns, the spreadsheet will show Gross Profit as a % of Total Sales.

• Enter your Expense Categories.
• Industry Averages

The first column, labelled "IND. %" is for posting average cost factors for businesses of your size in your industry.  Industry average data is commonly available from industry associations, major manufacturers who are suppliers to your industry, universities, Chambers of Commerce, or your accountant. It is unlikely that your expenses will be exactly in line with industry averages, but they can be helpful in areas in which expenses may be out of line.

If you are unable to locate this data, don’t panic.  It’s not a showstopper!  Ask your accountant next time you visit to see if they have the data you require.

Enter your figures!

• Income

Refer back to last years Profit and Loss Statements.  Look at how much income was generated and decide whether this is viable this year.  Look at changes in your business since this time last year.  Have you introduced new staff members or have you reduced staff numbers.  Is the market demanding more of your products and services, or less?  Are there additional services that you could introduce this year to cater for changing market demands? 

Ensure that the projected income you enter for each month is achievable.  There is nothing more disheartening then being miles off your projected targets – or more dangerous from a solvency perspective!

• Operating Expenses (also called Overheads)

These are necessary expenses which, however, are not directly related to making or buying your products/services. Rent, utilities, telephone, interest, and the salaries (and payroll taxes) of office and management employees are examples.

Change the names of the Expense categories to suit your type of business and your accounting system.  You may need to combine some categories, however, to stay within the 20 line limit of the spreadsheet.

Most operating expenses remain reasonably fixed regardless of changes in sales volume. Some, like sales commissions, may vary with sales. Some, like utilities, may vary with the time of year. Your projections should reflect these fluctuations.

The only rule is that the projections should simulate your financial reality as nearly as possible.

In the "%" columns, the spreadsheet will show Operating Expenses as a % of Total Sales.

Refer back to last years P&L.  Are there seasonal changes that you need to allow for in your spending habits, or increases in production?  Are economic changes likely to increase prices this year or reduce them?  Are there other suppliers you could use?  Could you bring some costs back in house, or alternatively outsource them out?

When entering your projected monthly expenses, make notes of your assumptions by right mouse clicking the cell and selecting ‘Insert Comment’.  This way, when you come back to it, you will know what your original assumptions were.

Your Net Profit
The spreadsheet will subtract Total Operating Expenses from Gross Profit to calculate Net Profit. In the "%" columns, it will show Net Profit as a % of Total Sales.

The most exciting part of this exercise is the monthly profit figures.  If they’re not showing a profit, go back to your income and operating expenses and determine what you can do to bring them up to a profit.