When we get financial statements from our accountant, there are a lot of things that are in there. Generally when you open it the first page is a trading statement, then a profit and loss and a balance sheet. So what is a trading statement?
A trading statement is the top bit of your profit and loss and it shows you your income from your sales, less your direct expenses. What it does is it gives you what’s called your gross profit. In English sales, what comes in the door. direct expenses are the things that you need to pay out in order to make those sales.
So if you’re a trades person or a builder, you’re going to have subcontractors and you’re going to have materials. If you’re a shop, you’re going to have the purchases of your stock. If you’re a service type business where all our sales comes from, say professional services like here at HBA Encompass our cost of sales is our wages and super of our professional staff.
Using a Trading Statement allows you to see how much you’re making after your direct expenses. That gives you the money that you’ve got to run the rest of your business. It’s called a gross profit.
Keeping an eye on your gross profit margins is something you should do from year to year, because it shows you if your direct expense costs are creeping up or down. The bigger your business, the bigger percentage increases in those makes a massive difference in your profitability.
In a nutshell, the first page of your financial statements is a trading statement. It shows you sales, expenses relating directly to sales and gives you your gross profit.