[00:00] Welcome, welcome to the Erin Davis show. I am Erin, your business money coach, and I help business women understand their numbers and build practical money systems that support the business and life that they really want.
[00:12] So today we're talking about what happens after you open your profit and loss statement because you can understand your PL and still have no idea what the business can safely afford this week.
[00:25] So your PL is useful, but it's really just one window into your business. It's not the whole money system. So in this episode, I'm going to show you what your PL can tell you, what it can't tell you on its own, and a simple three part rhythm that helps you know what to check and what to do next.
[00:47] And if this is exactly the gap you're trying to close, enrollment for my new business money foundations program is now open. It's a six week program.
[00:58] We're launching on the 27th of October. And I'll tell you more about it at the end of this episode. You'll find all of the links in the show notes and the description.
[01:08] But for now, let's begin with the job of the panel. So this this is a really interesting topic because I see a lot of business women run a profit and loss statement, and that's it.
[01:23] They just open it up, but then they don't know what to do with it. And it's um it's really common for a lot of women to just do the coding on their Zero file or whatever platform they're using because what we're talking about today is zero, but you can apply this to any type of accounting software that you have.
[01:46] But they just do the coding. So the transactions come through, they are just coded um straight from the reconciliation screen. And then that's it.
[01:56] They don't go any further. They don't do the next part to have a look at what actually. Is going on in their account. And so a revenue profit and loss statement.
[02:10] Or a profit and loss statement shows you actually quite a few different things. And it's important that we start to understand what the profit and loss statement means. What numbers you need to pay attention to.
[02:24] And then we actually need to start to have a think about well, what's the next step? So the profit and loss is for a period of time. So it runs for, say, the last quarter, 1st of July to the 30th of September.
[02:37] It can run from the first of July to the 30th of June. It can run from any particular period that you want. But really a profit and loss statement tells you for this amount of time for this period, this is your revenue, these are your cost of goods sold, these are your expenses, and this is your profit.
[02:57] And so you can change. The period that you are reporting, just by going up into the top of the report, you can change the the dates and you can also bring comparisons for the same period last year.
[03:10] You can look at the same period last year, you can look at the same month last year, you can look at the same quarter, you can look at the previous month, the previous four quarters. Whatever that comparison period is, it doesn't matter.
[03:25] It's just what's important to you. But the point is that a profit and loss statement can show you over time what's been happening in your business.
[03:36] The period really matters, though, because we need to make sure that those dates are correct. We also need to make sure that the profit and loss statement is running on an accruals basis or a cash basis.
[03:49] It's important to know the distinction. Now, an accruals basis, profit and loss statement is that if you are generating for your customers.
[04:00] The invoice as is shown as revenue when the invoice is generated. So the date that you're putting on the invoice, that's when it will show in your profit and loss statement.
[04:11] The same as your suppliers. So when you are getting a bill from one of your suppliers and you enter that into your file as a bill, you are entering the date which is shown on top of the bill.
[04:25] That date is well, that determines when that bill shows in your profit and loss statement. It doesn't matter when it's paid. The same as your invoices, it doesn't matter when your customers actually pay you, it's the date that you generate the invoice.
[04:42] And so this is a real reason why a profit and loss statement can look very different to the cash in the bank. So if you are running your profit and loss on a cash basis, it is just that.
[04:55] So when the customer pays their invoice, the date that it's received. That is the date that determines which profit and loss statement period it is included.
[05:07] The same as when you pay your bills, whatever date you pay them determines when it shows in the profit and loss statement. Now I would suggest that most profit and loss statements are set to an accruals basis.
[05:19] This is how usually the accounting work is prepared. And so when you're running your profit and loss statement, and if you are having a look at it and thinking, well, that profit is way too high.
[05:30] I don't have the money in the bank, that is one of the reasons why. Another reason why is that maybe you are purchasing plant and equipment. The plant and equipment doesn't get shown as an expense in your profit and loss statement.
[05:45] Rather, it sits on the balance sheet. And so when you are looking at, well, what is my profit and loss saying with the profit figure compared to my bank account balance.
[05:56] Well, that plant and equipment payment has come out of the bank, yet it's not sitting on my profit and loss statement. With equipment purchases, the way that it is claimed is over a period of time.
[06:08] Now, this is call depreciation. So you might see in your uh financial statements when the accountant prepares them that there is an amount for depreciation. Depreciation is part of that cost of the asset is written off over time.
[06:22] It has no correlation to the money that goes out of your bank, the timing of when that goes out of the bank, but it's an important distinction because it's actually cash leaving your account, but it's not showing on your profit and loss statement.
[06:37] And so when you are trying to reconcile between, well, this is the income coming in, these are the expenses or the things that I have paid going out of my account, you need to take into account things that end up on the balance sheet.
[06:50] Another thing that ends on the balance sheet are loan repayments. So the loan repayments themselves actually get paid out of your bank account, but the payment itself. Is not tax deductible.
[07:01] It is not an expense of the business. The interest component of that loan repayment, that is deductible. That is what gets shown in the profit and loss statement. So you have part of the repayment gets taken off the loan as principal reduction.
[07:16] The other part is interest. So when we're reconciling our um cash back to our profit, if you're making loan repayments, the principal part will come out of the bank, but it doesn't show anywhere on your profit and loss statement.
[07:31] Another thing is owners' drawings. So if you are running a sole trader business, you can't pay yourself wages. You pay yourself as drawings. And so it doesn't show in the profit and loss statement.
[07:44] The profit and loss gives a net profit figure. That figure is taxable, apart from some of these differences between accounting and tax, which I've briefly discussed, but generally.
[07:59] Let's just say for simplicity that that profit figure, that's your taxable profit, that's what gets included in your tax return. It doesn't matter how much money you have actually taken out of the bank personally to use, um, that doesn't matter at all.
[08:13] You are taxed on the profit figure. And so when you're trying to look at, well, what's profit and what is the correlation between cash in the bank, if you're taking money out of the business as a sole trader, it will be shown as drawings on the balance sheet.
[08:29] It doesn't come into the profit and loss statement at all, anyway. If your business is run through a company, though, you would be paying yourself wages, and those wages are shown in your profit and loss statement.
[08:40] So structure and the way you structure your business will factor into what is my profit and loss statement look like. The thing that I want to reiterate to you, though, is that there are lots of different questions that we need to be aware of.
[08:59] when we're looking at our profit and loss statement. So we need to ask, are we looking at the right period? Is it cash or accruals? And if we're looking at coming back to reconciling back to cash, well, we can it's not quite so straightforward.
[09:14] And so I think these are the type of questions that you need to start to be asking or thinking about, which will give you a better understanding of your business's performance.
[09:27] And we can then start to have a look at, well, is our business profitable over a certain period of time? Now your business might be seasonal. So you might have some really good months, but then you might have some really poor months which are not very profitable at all.
[09:43] And if you're not looking at well what is the good months and what are the bad months and you're not planning for it, it makes it really, really hard to manage the cash flow.
[09:53] But your profit and loss can tell you when you're running your reports which ones P Which one's not. And if you start to ask some better questions, then it is much, much easier to make decisions in your business.
[10:08] You also need to know that your profit and loss statement does not include GST. You, as the business owner are just a collector for the tax office. You are just collecting the GST and you are remitting the net GST off to the tax office.
[10:24] That has nothing to do with you. It doesn't belong to you. It's not your money. So it doesn't include, it doesn't get included at all in your profit and loss statement.
[10:35] And I say a lot of business owners get stuck by this managing their cash flow, which is a whole nother topic. Managing their cash flow can be really tricky because they just assume, well, if I'm charging $110, that whole 110 belongs to me.
[10:51] Whereas, in fact, no, only the 100 belongs to me. The $10 goes off to the tax office. And so it's important to understand what those GST implications are. Because we need to know.
[11:05] What job our profit and loss statement is doing. We need to give it a very clear job. And then it becomes much, much easier to see why profit and cash give us two different stories.
[11:22] And so this is this is a really important point because profit is measured over that period of time, as I've said, but your bank account balance is at a point in time.
[11:34] So this is um, as we've said, it's loan repayments, it's plant and equipment payments, it's personal um payments to owners. Those things are not touching your profit and loss statement.
[11:47] GST, that's not touching your profit and loss statement. And so when you are starting to look at cash, we need to we need to think about things a little differently.
[11:58] And you know, this is where we start to. We start to drill into understanding what our financial statements are meaning rather than just stopping and allocating all the transactions.
[12:12] Because allocating the transactions is just one part of it. It's the very first part. And I just want you to know that allocating the transactions, yes, that can be automated.
[12:25] AI can do a lot of that for you, but you still need to be checking it. You still need to know what is being auto-coded because quite often it's incorrect.
[12:36] And if you keep that autocode on and you then don't go and review your profit and loss statement could be telling you a whole heap of rubbish that you're not you're then making business decisions based on that, which is totally incorrect.
[12:52] So yes, AI is there. Yes, AI can help you with your reconciliations and make it quicker, but you also need to have these steps in place to make sure that whatever you are producing.
[13:05] Or whatever AI is producing is actually correct. And so the next part you need to do is actually review the numbers sitting behind the profit and loss statement.
[13:15] And this is where we need to take a really practical approach. It doesn't take very long to review it. I have got a quick way that we can do it, which is just go through and review your general ledger.
[13:28] It can seem overwhelming, it can seem big, but I tell you, once you understand these business money foundations, and the quickest and simplest and most easiest way to review, then it makes this process doable, manageable.
[13:44] The anxiety levels just decrease because you are not so consumed with, oh my God, look at all these numbers here. This morning I reviewed one with a client and there was over 5,000 transactions just for the quarter.
[13:57] It literally took us, um, it was a bit longer today, actually. So it took us about an hour to review it. But in that hour, I was teaching her how she needed to review the things that it's picking up, the things that we need to look for.
[14:12] But typically, for me to review a general ledger, it takes me like 15, 20 minutes max. And I know that every single transaction in my profit and loss statement and my balance sheet is correct.
[14:24] Now you can go through and you can click on every single transaction if you like, or every single account and look at the transactions. I just find that tedious. I find it slow.
[14:34] I get bored with it and I lose interest. And so how can I make this super quick? How can I make it efficient? How can I make sure that it is correct? The general ledger for me is super easy, super quick.
[14:46] And so this is where we need to support the information that is being shown in our profit and loss statement. We need to have comfort that what those numbers are showing are actually correct.
[14:58] We found quite a few code. Errors this morning. And if we had just relied on the profit and loss statement as it was, incorrect decisions would be made because the numbers sitting behind those accounts were not right.
[15:12] And so this is where we need to start to ask some better questions. So the questions that I want you to ask in relation to profit, did the business actually produce a profit or loss over a certain period of time?
[15:27] What is my cash position? What cash, what money is actually available now? What do I still have that's moving in and moving out? What are my upcoming obligations?
[15:39] What do I need to set aside? What are my GST requirements? What are my other tax implications? What are those payments coming out and when?
[15:50] And what is the bigger picture? You know, what is the next decision that you need to make as a business owner to move your business forward? And you know, if you are not looking at your numbers.
[16:03] It makes it really, really hard to make these business decisions with confidence. And so these are the different questions that I want you to start to ask yourself because your financial statements show so much information, but we are just not paying attention to them.
[16:21] And I think it's because nobody has ever shown us what to do. Like you can start a business and you it is really easy to start a business, but we don't know what our compliance obligations are.
[16:34] We don't know how to interpret the reports. We don't know how to set up our zero files correctly. We don't know what our structure is actually telling us.
[16:44] And this setting these things up to start with, these business foundations will mean that you can produce reports which will be valuable, which will help you to grow your business, will help you to manage your cash flow.
[16:58] And I see this with so many small businesses. The cash flow piece. Is hard. It is hard to manage. And if you're not sure of what's coming or going, and then all of a sudden your accountant says, Well, yes, you've got a big profit.
[17:12] You need to pay this tax. You go, My God, where has all the profit gone? Where is it all? There's no money sitting in the bank. That's when we can start to ask these better questions as to, well, what profit did I make?
[17:25] Where did it go? And what's coming up. They are the type of questions that I want you to start to ask yourself. And so um we need to put all the pieces together.
[17:39] Now this can look like our money foundations can look like a top away drawer, right? It can have lids and containers all over the place.
[17:49] We know they fit together, but we don't really know how they fit together. They're all in there, it's all a mess, and you don't know where to start. You don't know which piece.
[18:01] to put together but I can tell you that these are all pieces to the puzzle. And once you get the right container with the right lid, which is the right report, which with the right information and understand it, those pieces go together.
[18:16] You can then stack it. You can then build your Tupperware container draw and it looks beautiful, but it is also usable. It is also functionable and you can get the information that you need.
[18:29] And so I want you to start to think about where are the missing pieces? You don't want to just produce another report. You don't want to just produce a profit and loss statement because you think that that's what you have to do.
[18:41] You need to actually understand it. That is the piece where the money foundations are so important because if we are just producing reports but not reviewing them, not looking, not asking, not acting, that information is useless.
[18:57] You know, we are in the world of information overload. We can access so much information. AI can interpret everything for us, but if we're not understanding what's actually being produced, we're not checking the values or the validity of that information that is then produced, used to produce those reports, then we're not even really getting a very clear picture of what it is that our business is telling us.
[19:26] And so this money rhythm is so important. There is a process that we need to go through in order to make sure that our accounts are correct. We need to notice what's changed, we need to look at our revenue, we need to understand what our direct costs are, what our cost a goods sold are.
[19:44] We need to know what operating expenses are, and then we need to know what profit is. So a lot of people talk about revenue, but that revenue doesn't tell you the whole story because how much did they need to spend in order to generate.
[19:59] That point. Revenue. You know, profit is the most important number. That is the revenue, the sales, less all of your costs. That's what's left over.
[20:10] That is the important thing. That is where you can start to build wealth. The next part is what did you do with the profit? And that's um a topic for another day. But you know, I I really I just want you to start to understand what profit means.
[20:28] How do we do it? What is why is profit different to cash and why they don't meet up. Now remember that there are differences um between accounting and tax.
[20:40] So you may find that the business is profitable on paper, but it is cash flow poor. Um that is really, really important.
[20:52] And so the this episode is not about. Saying that you're doing anything wrong. It is the invitation for you to start to look a little deeper, to start to go the next step.
[21:07] And I think that as a business owner, you have a responsibility to understand your numbers. Now, we're not all taught this. We don't all get this information. We're not taught it at school.
[21:18] If our parents are not savvy with money or good with money, then where do we get this information from? You know, you can't be hard on yourself for not knowing this.
[21:29] But what you can do is where do I need to go to learn? How do I need to ask better questions? What support do I need? What circle do I need to be in where these conversations are normal conversations.
[21:43] And so this is where I want you to start to pay attention to your profit and loss statement really matters. It gives you useful information about what happened in your business over a period of time, but it doesn't mean it's done the whole job.
[22:02] And this week. I really want you to open your profit and loss statement and just choose one of these useful questions. You know, you don't need to have all the answers today.
[22:12] You don't need to prepare a fancy whiz bang budget. You just need to start, and you need to start from where you are. And if you want support to build that wider money system, Business Money Foundations is exactly built for you.
[22:29] The enrolments are now open. It's a six week program where I'm going to put all of these practical systems and pieces together so that you can understand what you're looking at.
[22:42] You know what to check and you have that very clear next step. Now I'm an accountant. I have been doing accounting for over 30 years. I know the pieces that you need to have in your business to make it run smoothly.
[22:56] And so we launch on the 27th of October. Enrollments are closing on the 25th of October. But you can read the full details of the program and join through the link.
[23:08] In the episode notes. I'd really love to help you to be able to build that money rhythm that you can sustain. This six weeks is about the foundations.
[23:19] It is all the reports that you need to run. It is understanding all the different components. I have heaps of AI tools there to be able to support you.
[23:31] But most importantly, you're going to understand what those tools are for. So beyond the six weeks, you are going to be able to continue to learn and grow and make better decisions.
[23:45] The money stress, the money overwhelm is going to decrease because when you start looking at this, when you start paying attention to it, not from a place of shame or judgment, but from a place of learning and understanding, that's where things change.
[24:01] That's where you can step into a place of really understanding your business numbers. Because we know that money. Money allows freedom and choice.
[24:13] It gives you the opportunity to have what you want, to do what you want, to show up in the world as uh as authentically as you, without having to question every single decision, without having to worry about whether you can afford it or not.
[24:29] You get to create that life that you want. And so this is where I come from, a place of creating your own version of rich. I love the Granded Rich Girl. It is just that. Create your own version of Rich, but it starts with understanding your numbers and business money foundations.
[24:45] This is what we do. We understand our numbers. And I would love to have you in the program. So links will be in the show notes. I hope you found this episode help helpful.
[24:57] Let me know. Send me a message. contact me on socials. Let me know how you feel about your profit and loss statement. Do you understand it? Do you know where to start?
[25:08] Do you have more questions and answers? Or is it something that totally freaks you out and you don't even know where to start? Because if that's you, then just know that I can help you and I can support you.