Why do profit and loss accounts matter?

In what kind of shape is your business financially? A profit and loss account – also known as an income statement, operating statement, or statement of financial performance – shows how your business is doing during a specific period.

The profit and loss account and the balance sheet together make up the financial statements. Eenmanszaken (sole proprietorships) are not required to draw up financial statements, while BVs are. How do you create a profit and loss account, and what is its purpose? 

What is a profit and loss account? 

A profit and loss account is a periodic summary of a business’ income and expenditures; it is the financial record for a specific period (typically one year). You simply add up all the revenues of your business and then deduct your expenses. 

What to include in your profit and loss account 

You must put the following numbers in your profit and loss account: turnover (revenue), expenses, and profit. A negative profit margin is when your costs are more than your total revenue for a specific period – also known as a loss. 

Revenue is the result of the sales of products and/or services over the course of one year. You must then deduct the purchase value from the revenue. Next, you add up all the business expenses you incur to achieve the sales results. Your profit is the outcome of: revenue less purchase value and expenses. 

On page 17 of the Book of Finance, you will find an example of a profit and loss account (income statement). 

Annual statement 

Employees receive an annual statement from their employer once a year, which shows the wage sum, social security contributions withheld, and payroll tax.  This tells employees at a glance how much their employer paid and how much salary they received. Was the employee able to live on this money, rent, buy a house, or redeem a loan? In addition, the annual statement is a means of verifying income for an income tax return, the Employee Insurance agency (UWV), or mortgage providers. 

If you are an independent business owner, you will not automatically receive an annual statement telling you how much profit your business earned during a particular year. However, you would still like to know what you worked so hard for. The profit and loss account is a type of annual statement for your business, which will also tell you how much you earned in revenue, how much you spent on purchasing, and what your expenses were. Just like an employee, you look back and calculate whether your bottom line is sufficient to cover personal expenses, repayments, and interest. 

What purpose does it serve? 

You can use the numbers from your profit and loss account to make changes to your business where necessary. Is your net profit at the desired level, or below target? You will want to hang on to a positive result (profit), and even increase this profit. Discuss the numbers with your financial consultant. You might want to go over the expenses, how you can cut costs, price calculations, and purchasing benefits. You can also compare your data with that of other business owners operating in your sector – request this data from the appropriate industry association or bank. 

Finance 

Financiers, such as banks, can derive valuable information from the profit and loss account and balance sheet, using calculation formulas (key figures).  The financier will need these key figures in order to assess whether your business is in good financial health. To be able to assess this, they will need to look at your revenue and purchase data. The financier will compare your numbers against those of other businesses operating in the same sector. 

If you are looking for funding, make sure you create a realistic profit and loss account.   You should also create a ‘scenario B’, where you earn 15% less revenue. You must adjust your purchase costs and variable expenses. Fixed expenses such as rent and human resources/staff costs will remain unchanged. You should then ask yourself if you will make enough net profit, taking into account your personal budget. 

Financial insight 

Your profit and loss account will give you financial insight. You should use a number of calculation exercises from the Financial Statements Manual (in Dutch), ‘Information on key figures’ section. Alternatively, you can also enlist the services of an expert, such as a bookkeeper or accountant, through NOAB  (in Dutch) or NBA. If you are knowledgeable about your data, you will be a suitable partner for them and, for example, financiers. 

Improving your insight 

Improve your financial insight with tips from the video: 

For English subtitels to the video above, click the settings wheel, click ondertiteling and select English.

Proof for the Dutch tax authorities 

You will be required to pay tax on your business profits. The amount you will pay depends on several different factors, including your profit and the type of tax (income tax or corporate tax) and on tax schemes. In addition, you are also required to keep accounts. Once the tax authorities have checked your accounts, they will determine the amount you need to pay. If you have an accurate profit and loss account, you will pay the correct tax rate after receiving a tax assessment. If you inaccurately state the amount in profit you have earned, the tax authorities will estimate your profit, which will generally not be in your favour. 

If you would like to discuss your financial situation with an expert, feel free to contact the KVK Financing Desk: 0800 10 14.