In the last post we introduced you to the Profit and Loss account or P&L.
The three items which make up the main divisions of your Profit and Loss Account are:
1. Revenue or Sales. You can subdivide this into several categories such as product and service etc.
2. Direct cost of Sales. Direct cost of sales, sometimes called variable cost or simply cost of goods (COGS). They are called variable costs because they go up and down as your sales go up and down. In a store, direct cost of sales is easy to recognize as the amount you pay for the items you sell, but in most businesses it is not so simple. The easiest way to look at it is any cost that you would not have incurred if you had not made the sale. It includes things like materials, direct labor, sales commissions etc.
3. Fixed or overhead Costs. As it sounds, these costs do not change as your sales change. They include such items as rent, accounting salaries and fees, insurance etc.
As stated before, it is most important that you clearly define these categories, and use them consistently. In fact consistency is the most important part. If you include gasoline as a direct cost one month or on one job, you must do the same on every month and every job. Only by doing this will your numbers be comparable, and trends will be found.