Designing your Profit & Loss Statement to provide financial insights

By David Edmunds, Financial Analyst

Cloud-based accounting systems such as Xero have provided numerous advantages for small businesses, particularly the increased ease of getting an up-to-date view of your business’s financial performance. 

That being said, the standard charts and profit and loss reports in these software options aren’t designed to provide management insights to your particular business. Have a look at the two different profit and loss reports here. Same data, just different layouts. Consider which layout would help you get to the source of a business issue, such as declining profit margins.

Creating a custom profit and loss report layout can create value for your business through significantly increasing the ease in which you can identify trends or changes in your business’s financial performance. It is often one of the first changes we make when beginning to work with clients on an advisory basis.

If you want to get more value from your accounting data, consider having a custom profit and loss report with the following features:

Create categories

Grouping income and expenses into categories allow you to more quickly identify overall trends in the business. Looking at line items in isolation can highlight false positives or negatives, particularly with periodic or annual costs if these are not being amortised. Looking at category trends allows you to pick up on bigger themes within the business, such as a declining return on labour.

Separate direct and indirect costs

By default, most accounting packages do not separate direct labour costs from indirect labour costs. Not having this transparency makes it more difficult to identify any changes in your gross profit margins. It can also create inconsistencies between the margins your job management system indicates are being achieved, which makes it more difficult to pick up on any errors or issues. You may need to create some duplicate accounts, one for direct costs, another for indirect.

Eliminate infrequently used accounts

With the ease of adding accounts in most accounting systems, profit and loss reports can become beasts. This can be distracting, making it harder to pick up on what is important. Consider if any of your account line items could be consolidated especially if having the separate account is not providing material insights or required by any users.

Minimise the use of Other or General accounts

This may sound a little contradictory to the point above, but wherever possible try to minimise the use of “other” or “general” accounts. If it is a type of cost that is material to the business and consistently being coded to this account, consider whether a separate account should be used for these transactions, or whether they could be incorporated into another existing, more distinct account.

 

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