What is net profit?

You are in business to make a net profit, so that you can live the lifestyle you want.

You are busy working in your business, creating new products and services, engaging with potential new customers, keeping on top of the bills, and invoicing regularly to keep the cash flow moving. There is much to do, but do you know where your net profit is sitting at the end of each month?

Yes, I hear you saying you have a fair idea of the money coming in and you have a feel for the money going out. You make sure you see the bills as they come through the door. But what about those regular direct debits that come out of your bank account for subscriptions, leases, loan repayments etc. Are you keeping them in mind when you calculate your net profit?

If you don’t keep track of the bottom line how do you know how your business is performing? What will you show the bank when you want to expand the business? Banks rely on the health of the profit and loss statement and balance sheet when they consider whether they are going to offer a loan. They look at the gross turnover and the direct costs for earning that gross turnover, and they look at the general expenses for running the business. How many assets have you got behind the business? What loans do you already have that are supporting the business? Are you paying those loans back on time? What is the balance of each of these loans now?

Accounting programs like MYOB and Xero produce profit and loss statements with a few clicks of the mouse. Have you ever wondered at the accuracy of that net profit figure? If your bookkeeper is reconciling the bank account and credit card statement, entering all your bills, and ensuring all the invoicing has been done for the month, the net profit figure will be fairly accurate. What influences accuracy though, will be what I call the hidden costs of operating the business, such as interest paid on overdrafts, and loans. Have these costs been included for the month? Not only is it important for the bank accounts to be reconciled, but it’s also important those balance sheet items to be reconciled regularly, too, so that the interest on the loans can be accounted for.

The loan repayments don’t affect your net profit, but they do affect your cash flow. Make sure those repayments are allocated against the loan account and not caught up in the profit and loss statement, otherwise your net profit will be showing less than it should be.

Another common account that can reflect a less than accurate net profit are those transactions sitting in the suspense account. The suspense account is used by many bookkeepers when they don’t know the details of the transaction. If you ever see an amount in the suspense account, make sure you follow up and reallocate those amounts to the correct ledger accounts.