What's the link between P&L and Balance Sheet?

It's a snapshot of things you own:

Assets

• Bank Accounts including Cash

• Aged Receivables (Debtors)

• Stock and Work in Progress

• Fixed Assets (Property/ Plant/ Equipment)

• Other e.g. Prepayments, Other Debtors, Overdrawn Directors Loan

and who you owe:

Liabilities

• Accounts Payable (Creditors)

• Taxes Payable (Corporation Tax, VAT, PAYE)

• Loans and Overdrafts

• Other e.g. Accruals, Directors Loan (Owed to Directors) and Dividends Payable

plus your stake in the business:

Equity

• Share Capital

• Retained Earnings (Profits/Losses brought forward from previous years)

• Current Year Earnings (Net Profit)

And is a moment in time, usually measued at COB on a month / quarter/ year end

There are two ways to show a balance sheet

EITHER

• Things you own (Assets) = Who you owe (Liabilities) + Your stake in the business (Equity)

OR (the most common way)

• Things you own (Assets) - Who you owe (Liabilities) = Your stake in the business (Equity)

Your profit and loss account includes:

• Income or Sales or Turnover - To customers

• Cost of Sales or Direct Costs - The cost of producing those sales

• Gross Profit or Gross Margin - The difference between sales and cost of sales - a fundamental KPI %

• Operating Expenses or Overheads - All other costs excluding finance that are often fixed

• Depreciation - Spreading the cost of fixed assets over a period of time

• Operating Profit or Operating Income - Gross Profit Less Overheads

• Finance - The interest (not capital repayments) on the cost of finance

• Profit Before Tax - Operating Income Less Finance/ Depreciation

• Tax and Dividends - Corporation Tax on Profits and Dividends declared

• Net Profit or Retained Profit - Profit left in your Business after Tax and Dividends

It captures a period of time, often a month, a quarter or year.

Your cash flow statement shows:

• Opening Cash

• Cash from Operations - (Collection of Aged Receivables, Payments for Stocks, Operating Expenses, Interest, Taxes)

• Investing Cash - (Fixed Assets)

• Financing Cash - (Equity Movements, Finance Raised/Repaid, Dividends Paid)

• Closing Cash

Use KPIs to:

• spot trends / danger signals

• plug profit drains

• maximise cash

• optimise performance

KPIs include:

• Gross profit %

• Net profit %

• Debtor days

• Stock / asset utilisation

• Operational measures, e.g. occupancy, job costing