Most businesses, especially SMEs, struggle to keep their books up-to-date. It can be attributed to a lack of knowledge and the unwillingness to learn. But robust accounting is often the difference between the success and failure of an organization.
With ACRA mandating annual return filing for every company in Singapore, organizations now do not have the option to be sluggish with their books of accounts. They mandatorily have to prepare their cash flow statement, balance sheet, profit and loss statement (P&L), and notes, amongst others.
This article focuses on developing an easy-to-understand template for your company’s P&L.
Who benefits from a P&L?
As the name suggests, a profit and loss statement helps calculate an organization’s net operating profit or loss. If the numbers are in the green, the company can decide whether to reinvest the same or pass it to their shareholders. If the numbers are in the red, there is a lot to ponder and turn things around.
In addition, a P&L also comprises several critical operating and non-operating figures, analyzing which would allow you to make crucial decisions pertaining to the company’s future. For example, it includes answers to questions like how to plan the upcoming taxes, is there a need to hire more employees, and more.
Even stakeholders, such as the government, lenders, and investors, benefit from diving deep into a profit and loss statement. It informs them about the company’s efficiency, the soundness of their business model and strategy execution, and the chances of receiving money they have invested/plan to invest.
Now that you are trying to establish a template for your upcoming P&L, here is what you need to do –
Segregate the revenue entries from the rest
The primary part of a profit and loss is to determine the revenue made in a given period. But for that, it is vital to draw a summary of revenue generated during the timeframe.
If there are multiple sources of income, make sure you group all of them into core and non-core businesses. Now transfer the final figure onto the P&L while attaching the table in the notes to accounts.
Compute the cost of goods sold
When you are selling a product or a service, it is imperative that you will have direct costs attributable to these sales. It includes the cost of manufacturing, raw materials, and direct overheads.
Calculate gross profit and gross margin
Gross profit is Revenue from core business minus cost of goods sold incurred by the organization. Gross margin (Gross profit/Revenue x 100) is an indicator of how profitable the core businesses of the entity are and if they are in line with the set expectations.
Segregate your expenses into operating and non-operating categories
Expenses come in several forms for a business. So prepare a table encompassing all the costs incurred during the period, such as rent and salary, and bifurcate them into operating and non-operating.
Take interest, depreciation, and taxes into the picture
Depreciation refers to the notional reduction in the value of business assets, like equipment, because of the passage of time and wear and tear. Interest income is usually an indirect cost that refers to the amount you have to pay on the debt you owe to your creditors.
Finally, taxes refer to the part of your earnings that you will have to pay to the Singapore government. All of these are expenses that reduce your profits.
Compute Net Profit
One of the last steps is to compute net profit. It refers to all the revenue minus all expenses and losses incurred for the period. If the answer is negative, it refers to net loss or spending more than you earned. If the same is positive, it means that you have made a profit in the period.
The article is a part of our comprehensive series on “Profit and Loss Statement”.