Profit and loss budget
Do you really understand what your profit and loss is telling you?
Fundamentally, it shows you whether you are making money over a period of time. Being profitable and generating cash are not necessarily the same thing. You can be profitable and still go out of business due to lack of cash. I’ll come onto that later.
When budgeting, there are some key numbers to look at:-
- Your sales
- Your gross profit percentage – gross profit / sales. (This is a key number, as the higher the percentage, the more you retain from each sale to cover your business overheads such as rent, insurance, sales promotion costs, etc. and to retain as profit).
- Your overheads (this is the total of your expenses which don’t directly relate to the sales you make. For instance, a restaurant’s rent costs would stay the same regardless of the level of customers that were served, but you would expect food purchases to increase as sales went up).
- Your net profit. (This is the profit before tax and represents the profit you have made after costs, but before paying tax).
If you want a quick and easy way to see if you are on track, why not use a traffic light system? This is a great way of quickly identifying what’s on target and what’s not. You can set your own parameters, but here’s a suggestion:
Red : 5% or more below budget
Amber: between 0% and 5% below budget.
Green : on or above budget.
We’d love to hear how you get on.
The next issue of our series will be focusing on the ”balance sheet budget”. Feel free to sign up to our blog for automatic updates. Alternatively subscribe for our free online resources here.