What the profit and loss tells you

Once a year your accountant hands over a set of financial statements. The page most people turn to first is the profit and loss. It's also called the P&L, the income statement or the operating statement. They all mean the same thing.

The profit and loss covers a period of time, usually the financial year. In Australia that runs from 1 July to 30 June. It answers one question: over that year, did the business earn more than it cost to run?

The three parts

Income. Money earned from what you sell. On a livestock farm that's pig, cattle, sheep or wool sales, plus things like agistment fees.

Costs. What it cost to earn that income. Some costs go up and down with the size of the herd or flock, such as feed, animal health and freight. These are called variable costs. Others stay much the same whatever you run, such as rates, insurance and permanent wages. These are called overheads.

Profit. Income less costs. If costs are bigger than income, it's a loss.

Things that catch people out

• Stock on hand. Farm accounts often include a line for the change in livestock numbers or value over the year. Selling down the herd can make income look high, and building it up can make it look low. Ask your accountant how it was worked out in your accounts.
• Depreciation. This is a cost in the profit and loss, but no money leaves the bank for it. Lesson 3 covers it.
• Loan repayments. The interest is a cost. The part that pays off the loan, called principal, isn't in the profit and loss at all.
• Drawings. The money your family takes out for living costs often isn't shown as a cost either. It depends on how the business is set up.

Looking back and looking forward

Your accountant's statements are prepared mainly for tax, and they look back at a year that's already over. During the year you can keep your own simple profit and loss each month or quarter. These are called management accounts, and banks often ask for them. Putting your actual figures next to your budget each month shows you where the year is drifting while there's still time to act.

What to look for

Read the total income first, then the total costs, then the profit. Then compare each line with last year. A big jump in one line, such as feed, is the question to ask your accountant or to think through yourself. If a word stumps you, our farm finance glossary explains it in plain English.