How to Understand Business Performance: From a Profit and Loss Perspective

This Standard Operating Procedure (SOP) covers how small business owners in Singapore can understand their business performance through a financial statement known as the Profit and Loss Statement (P&L) or Income Statement. The Income Statement summarises revenues, costs, and expenses incurred during a specific period, usually a fiscal quarter or year.

Why is it Important to Understand the Profit and Loss Statement?

Understanding the P&L statement is crucial for small business owners for several reasons:

• Performance Evaluation: It reveals whether your business is profitable or experiencing losses, which is vital for sustainability.
• Decision-Making: It guides management decisions on growth, cost control, and investment strategies.
• Tax Compliance: Necessary for reporting profits to the Inland Revenue Authority of Singapore (IRAS) and ensuring compliance with local tax regulations.
• Investor Attraction: Potential investors often look at profitability before deciding to invest in a business.

1. What Is the Profit and Loss Account?

The Profit and Loss account provides an overview of a small business’s ability to generate profit by increasing revenue, reducing costs, or both. It details all income and expenses, starting from revenue at the top and ending with the net profit or loss at the bottom.

2. Importance of the Profit and Loss Account

For small business owners in Singapore, the P&L account is crucial because it:

• Evaluates Business Performance: Aids in assessing the financial health of your business, helping you make informed decisions.
• Facilitates Informed Decisions: Provides insights necessary for strategic planning and operational adjustments.
• Supports Regulatory Compliance: Ensures adherence to local tax laws and accounting standards.
• Enhances Attractiveness to Investors: Presents a clear financial picture to potential investors, which can help secure funding.

3. Structure of the P&L Statement in Singapore

The P&L follows Singapore Financial Reporting Standards (SFRS) and typically includes key sections such as:

• Revenue
• Cost of Goods Sold (COGS)
• Gross Profit
• Operating Expenses
• Net Profit

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4. Major Components in the P&L Statement

• Revenue from Sales of Goods or Provision of Services
  • Gross Revenue: Total income from core business activities.
  • Net Revenue: Revenue after deducting discounts, returns, and allowances.
• Costs Incurred Related to Manufacturing, Trading, or Other Activities
  • Direct costs associated with producing goods or services.
• Gross Profit/Gross Loss
  • Result of revenue exceeding costs or costs exceeding revenue.
• Other Income
  • Includes interest received, grants, and other non-operating income.
• Expenses

• • Employee Benefit Costs: Salaries, bonuses, statutory payments.
  • Selling and Distribution Costs: Related to marketing and selling activities.
  • Advertising and Promotion Costs: Expenses for advertising campaigns.
  • Finance Costs: Interest and other borrowing expenses.
  • Administrative Costs: Office expenses and management salaries.

5. Components of the P&L Statement in Detail

5.1 Revenue or Sales

• Gross Revenue: Total income generated before any deductions.
• Net Revenue: Income after deductions for discounts and returns.

Example: If a local café, Sunny Café, has a gross revenue of SGD 100,000 for the year and offers discounts amounting to SGD 5,000, the net revenue will be SGD 95,000.

5.2 Cost of Goods Sold (COGS)

• Direct costs associated with producing goods or services.
• Formula: COGS = Opening Stock + Purchases during the period − Closing Stock
• Significance: Subtracting COGS from revenue gives the gross profit.

Example: If Sunny Café has an opening stock of SGD 10,000, makes purchases of SGD 50,000, and has a closing stock of SGD 8,000, the COGS would be SGD 52,000.

5.3 Gross Profit

• Formula: Gross Profit = Revenue − COGS
• Gross Profit Margin: Indicates profitability per unit of revenue.
• Formula: Gross Profit Margin = (Gross Profit/Revenue) × 100

Example: With a net revenue of SGD 95,000 and COGS of SGD 52,000, the gross profit would be SGD 43,000, resulting in a gross profit margin of 45.3%.

5.4 Operating Expenses (OPEX)

• Costs related to day-to-day operations but not directly tied to production.
• Categories include:
  • Selling, General, and Administrative (SG&A): Advertising, salaries, utilities, etc.
  • Depreciation and Amortisation: Asset value reduction over time.

Example: Sunny Café incurs SGD 20,000 in operating expenses, including SGD 5,000 for advertising and SGD 15,000 for salaries.

5.5 Operating Income (EBIT – Earnings Before Interest and Taxes)

• Reflects profit after operating expenses but before interest and taxes.
• Formula: Operating Income = Gross Profit − Operating Expenses

Example: With a gross profit of SGD 43,000 and operating expenses of SGD 20,000, the operating income would be SGD 23,000.

5.6 Interest and Tax Expenses

• Interest Expenses: Costs associated with borrowing.
• Taxes: Corporate tax obligations.

Example: If Sunny Café pays SGD 3,000 in interest and incurs SGD 5,000 in taxes, those amounts will be deducted from the operating income.

5.7 Net Profit (Net Income)

• Formula: Net Profit = Operating Income − Interest − Taxes
• Net Profit Margin: Measures overall profitability.
• Formula: Net Profit Margin = (Net Profit/Revenue) × 100

Example: If Sunny Café has an operating income of SGD 23,000, with SGD 3,000 in interest and SGD 5,000 in taxes, the net profit would be SGD 15,000, resulting in a net profit margin of 15.8%.

6. Analysing the P&L Statement

For small business owners in Singapore, analysing the P&L statement can provide valuable insights:

• Revenue Growth:
  • Monitor revenue over time.
  • Investigate the causes of fluctuations and adjust strategies accordingly.
• Gross Profit Trends:
  • Look for changes in gross profit.
  • Assess cost management and pricing efficiency.
• Operating Expenses:
  • Track OPEX in relation to revenue.
  • Identify areas for cost-cutting to improve margins.
• Operating Income (EBIT):
  • Compare operating income with industry peers to evaluate competitiveness.
  • Assess core business profitability and areas for improvement.
• Net Profit:
  • Consistent net profit demonstrates sustainable profitability.
  • Evaluate net profit ratios to ensure financial health.
• Non-Operating Items:
  • Focus on recurring profits for a clearer view of ongoing performance.

Summary

Understanding and analysing a P&L statement is essential for small business owners in Singapore to evaluate their company’s financial performance, profitability, and potential for future growth. By leveraging this financial tool, business owners can make informed decisions that support sustainability and compliance, while enhancing their attractiveness to potential investors.

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