A Profit & Loss (P&L) statement—also known as an Income Statement—is a simple financial report that shows how much money your business made and spent over a specific period. It helps you quickly see if your business is earning a profit or if it's running at a loss.
Overview
A P&L statement is divided into three main parts:
Revenue:
This is the total money your business earns from selling products or services.Expenses:
These are the costs incurred to run your business, including both direct costs (like materials and labor) and indirect costs (like rent and utilities).Net Profit (or Loss):
This is the final result after subtracting all expenses from your revenue. If the result is positive, you made a profit; if it’s negative, you incurred a loss.
Step-by-Step Guide to Reading a P&L Statement
1. Start with Revenue
What It Is:
Look at the top of the statement where your total sales or revenue is listed.Example:
If your business earned $100,000 in sales during the month, that number is your starting point.
2. Subtract the Cost of Goods Sold (COGS)
What It Is:
COGS represents the direct costs of producing the products you sell.Example:
If it cost you $40,000 to produce the goods you sold, subtract that from your revenue.Calculation:
$100,000 (Revenue) - $40,000 (COGS) = $60,000 (Gross Profit)
3. Deduct Operating Expenses
What It Is:
These expenses include rent, salaries, utilities, marketing, and any other costs required to run your business.Example:
Suppose your operating expenses total $30,000.Calculation:
$60,000 (Gross Profit) - $30,000 (Operating Expenses) = $30,000 (Operating Profit)
4. Account for Other Expenses and Income
What It Is:
Sometimes, there are other costs or income items, such as interest expenses, taxes, or one-time gains.Example:
If you have additional expenses of $10,000 (like interest and taxes), subtract them next.Calculation:
$30,000 (Operating Profit) - $10,000 (Other Expenses) = $20,000 (Net Profit)
5. Final Result: Net Profit or Loss
What It Is:
This bottom-line number tells you whether your business made money (profit) or lost money (loss) during the period.Example:
In our example, your net profit is $20,000, meaning your business is profitable.
Key Takeaways
Simple Snapshot:
The P&L statement provides a clear snapshot of your business’s financial performance over time.Profitability:
It shows whether you’re making a profit (positive net income) or a loss (negative net income).Decision Making:
By reviewing the P&L, you can identify areas where expenses might be cut or where revenue can be boosted to improve profitability.
By following these simple steps and understanding each part of the P&L statement, you can easily see how your business is performing financially and make better decisions to grow your company.