How to Read A Profit And Loss Statement
by Nathan Roberson | Dec 11, 2012
Often referred to as the P & L for a business, the Profit and Loss Statement is a summary of a company's income and expenses. At first glance, this report can be intimidating for the novice business owner or manager. Luckily though, most P & L's are laid out in a specific format that can easily be interpreted- once you get a hang of it.
How the Math Works
The P & L is also known as the income statement. As mentioned before, this form summarizes all business income and the associated expenses. So, income minus the expenses, will equal your profit or loss. Most business analysts suggest a review of your P & L at least once a month, depending on the nature of your business. These statements can give you a very good overview of your company's fiscal health. The numbers never lie, so even when you think you're having a great month, or even a poor month, your P & L will keep you focused to help map your strategy. From the P & L, you can:
- See your business's profit or loss after all expenses will be paid
- See how much your business is spending in various categories, such as advertising, labor, operations, etc.
- Get a breakdown of sales & revenue in as many categories as you need
The first section of a profit and loss statement typically starts with the good news first-revenue. This section will outline the source of sales and revenue from all divisions, products, and services for s specific time period. These numbers will be gross sales.
If this business sells products, than we would deduct and Returns and Allowances from the gross sales. As well, the Cost of Goods Sold will be deducted from gross sales and will leave us with our total Gross Profit.
The next section of the Income Statement will highlight the expenses of the company (less the Cost of Goods Sold because it's already been listed). Expenses are generally narrowed down to three different categories:
- Sales & Marketing Expenses- This is how much it costs to advertise, market, or otherwise promote goods or services. Commissions from sales will also be listed here.
- Depreciation and Amortization- Certain assets can be written off over time, according to IRS and accounting guidelines. Items such as computers, furnishings, and other equipment are included.
- General and Administrative Expenses- In this category, you'll find rent utilities, employee salaries, and most other operating expenses for a business.
A company's Operating Income is a key indicator of financial strength. This is the number you get when you subtract all expenses from the Gross Sales. A company can also have "Nonoperating Income", which is revenue driven from investments, or the purchase of an asset. After deducting "Nonoperating Expenses" and the associated taxes, you'll get to the company's true bottom line, the Total Net Income.
Having a basic grasp of this one financial statement can give you the edge you need when evaluating your own business, or even someone else's. If you are in the market to buy an existing business, you'll definitely want to be able to break down the numbers to determine the fiscal health of the business.
For your own business, there are some great accounting software programs that can generate a monthly P & L for your company that can take in all considerations. It may take a while to initially load all the proper data, but having access to these reports on a regular basis helps keep your fingers on the pulse of your business.
About Author Nathan Roberson
Often referred to as the P & L for a business, the Profit and Loss Statement is a summary of a company's income and expenses. Luckily though, most P & L's are laid out in a specific format that can easily be interpreted- once you get a hang of it. For your own business, there are some great accounting software programs that can generate a monthly P & L for your company. Visit http://www.outright.com to learn more.
Chia-Li Chien, CFP®, CRPC, PMP; Chia-Li “like JOLLY,” Succession Strategist of Value Growth Institute, dedicated to helping private business owners increase their company equity value. She is the award-winning author of the books Show Me The Money and Work toward Reward and a faculty of the American Management Association. Her blog and newsletter was named a Top Small Business Resource by the New York Times You’re the Boss blog. Contact her at email@example.com or (704) 268-9378 .