What is a Profit and Loss Report

The Profit and Loss report in Xero gives you a snapshot of your business’s income, expenses, and profit over a specific timeframe. This provides insight into your business’s financial health based on actual data.

People often get revenue (also known as income or sales) and profit confused with one another. However, profit is what’s left over after deducting your business expenses from your revenue. To improve your profit, you need to increase your revenue and/or decrease your expenses. It’s as simple as that!

It’s also important to note that a Profit & Loss report is usually accrual-based. This is the fancy accounting way of saying that it includes all of your income and expenses for a period, whether payment has been made or received or not (i.e. it’s not necessarily an accurate reflection of your cash flow). You can change this option in Xero if you wish, however, it’s an important accounting term that you need to be mindful of when looking at this report.

How to create a Profit and Loss Report in Xero

To pull up a Profit and Loss report in Xero, follow these simple steps:

1. In the Accounting menu, select Reports.
2. Find and open the Profit and Loss report. You can use the search field in the top right corner.
3. Set a Date range or click the arrow next to the date to choose a set reporting period, eg This quarter or Last month.
4. Select other options you want the report to show.
   • For today’s task, you’ll want to set it to Compare to the number of previous months in this financial year so you can see where you are at year to date.
   • To see your year-to-date total figures, click on More and select Year-to-date.
5. Click Update to run the report.
6. To save the updated report as a draft, click Save as, then select Draft. To reuse the report’s layout in future reports, click Save as, then select Custom.

For more info on further customising your reports, visit Xero’s website.

Your Profit and Loss report is your best friend in helping you make financial decisions

It’s easy to be convinced your business is doing great – through accolades, a boost in sales and feeling like you’re always busy. However, the reality is, if your expenses are high, you’re constantly feeling burnt out and you’re still trying to make ends meet – then there’s room for improvement.

So, with your profit and loss report in front of you, what should you be looking at?

What are your sales

Start by reviewing your monthly average revenue and ask yourself these questions:

• Were there any exceptionally high or low months?

o   Make a note of why certain months were so lucrative – did you run a promotion, did you launch a new product, or run more marketing activity compared to other months?

o   Dig deeper into why some months had lower revenue – did you reduce marketing spend, had reduced capacity or staffing issues?

• What do you think was the driver for these cases?
  
• What can you improve on next year?
  
• Are your sales split so you can see what areas of your business are generating the most/least revenue?

By analysing your sales in more detail, you can drill down on what worked well and not so well. This way, you can make informed decisions on what you can adjust with your business to maintain consistent profitability.

What are the costs of goods sold

How you’re charging for your products or services is another key factor that hugely impacts the health of your finances. Do you have a jam-packed schedule and workload, but for some reason, after your expenses are paid, you can’t pay yourself? This means your gross profit margins are too low to pay yourself a wage so to speak.

Get clear on what your gross profit margin actually is by utilising the formula function in Xero. You can create a formula that helps you to calculate your gross profit and have it show up in your P&L reports.Check out the steps on how to create a formula here.

What are your operating expenses

Get a good grasp of your operating costs and ask yourself if they’re all absolutely necessary. Pinpoint which are your one-off costs, you’re ongoing costs and what are your highest expenses. This will help give you a good indication of the areas you can cut back on.

To start you off, here are a few key areas you can begin looking into:

• Subscriptions – could you choose a cheaper plan, pay annually to take advantage of any discounts available, and are you still making the most of this subscription to even keep it running?
  
• Utility costs – can you change your plan or your provider/s, and are all of these utility costs still needed?
  
• Bank fees – would moving to a different bank or account prevent or reduce costs? What about payment processing fees? Are you using the most cost-efficient option?
  
• Salary – Can you pay yourself a wage after all the expenses for your business is paid? If not, it’ll be difficult to sustain the business and provide yourself with a salary that offers a comfortable lifestyle.

Spot the wins and lessons

Now that you’ve got a handle on how to retrieve your profit & loss report and what information to look out for, you can gain a bird’s eye view of how your year went overall.

Simply scroll down to the end of your P&L report and view your total operating expenses against your NET profit

The common scenarios that may play out are:

1. Low expenses, low profit: You didn’t spend much towards your business, but you also made minimal sales and didn’t grow.
2. High expenses, high profit: You invested a lot into your business this year, but you reaped the rewards with high revenue. This may present cash flow problems if you have fixed high expenses and your revenue isn’t guaranteed.
3. High expenses, low profit: You spent a lot towards your business, but there was no ROI. Perhaps the rewards will come further down the track? But it’s good to take a closer look at what you costs you can strip back on and how to drive more revenue.
4. Low expenses, high profit: You spent wisely with extra funds to reinvest back into your business with a high return this year. This is the ideal situation!

Be empowered to make decisions by knowing your numbers

Getting close and personal with your numbers has many benefits. Sometimes business owners don’t want to get too close in case it tells them what they don’t want to know, or it may not look as good as they hoped.

However, understanding your numbers is the cornerstone of effecting genuine shifts in your business. It’s the guiding light that aids in making informed decisions, paving the way for redirection and positive changes in the upcoming year.  Don’t be afraid to jump in the driver’s seat, take full control of the steering wheel and take your business to new heights.

Start the new year fresh with intentions and check out this article on 5 Ways to Set and Reach Your Financial Goals to gain some valuable tips around this.