Financially Savvy

I learnt to read a P&L and Balance Sheet over my Father’s shoulder on our monthly visit to the Bank Manager.  Who taught you?  I’m sure that like many in small business you are ‘self-taught’ … or still without a clear understanding.

It all starts with an understanding of the importance of establishing a correct ‘Chart of Accounts’.  Your Chart determines the structure of your reports, Profit & Loss and Balance Sheet. 

So who set up your Chart of Accounts?  Time and again we see them created by Accountants for taxation purposes rather than management purposes.

In creating a Chart for management purposes, you need to separate your Cost of Sales (COS) from your Overheads.  Cost of Sales are a combination of Cost of Goods Sold (COGS) plus any Direct Costs such as labour and subcontractors.

When you take the Cost of Sales from the Income of your business you reveal the Gross Profit.  This is the true measure of income for your business.

The remaining expenses called Overheads are subtracted from the Gross Profit and this reveals your Net Profit.

If you would like a detailed paper on the subject, send an email to bizplan@brightwater.com.au with 'FINANCIALS' in the subject line.

Written by Anthony Davis