What is a Profit and Loss Statement? + 3 Vital Insights it Provides
Updated: Apr 20, 2022
From solo and small business owners to large corporations, the profit and loss statement is one of the most critical financial reports to understand. Your P&L statement provides crucial insights into your company’s financial health to help you make intelligent decisions and grow.
What is a Profit and Loss (P&L) Statement?
Also known as an income statement or statement of operations, the P&L statement is a financial report summarizing your organization’s revenue, expenses, and profits or losses over a certain period (typically a month, quarter, or fiscal year). It shows your company’s performance in terms of sales, expenses, and profits.
In formula terms, the income statement calculates:
Revenue - Expenses = Net Income or Loss
What Does a P&L Statement Include?
Your P&L statement will include different revenue and expense accounts depending on your business and industry. The main categories your accountant will use to create your P&L statement are income and expenses.
Categorized by Revenue and Expenses, your accountant will pull data from:
Gains: Sale of investments or disposal of assets
Cost of Goods Sold (COGS)
Salaries, Benefits & Wages (i.e., payroll costs or cost of service)
Selling, General & Administrative (i.e., operating expenses)
Marketing and Advertising
Utilities (e.g., telecommunication, internet, electricity, etc.)
Depreciation and Amortization
3 Vital Insights from Your P&L Statement
The P&L statement tells you how your business is performing and points out strengths and weaknesses. Essential insights you’ll gain from this financial report include:
Your company’s profitability
Your P&L statement shows your gross profit, which follows the formula:
Revenue - COGS = Gross Profit
This data helps you answer:
Which products or services are profitable?
Which areas are not profitable?
Where do you need to increase sales?
Your business trends
Which way is your business trending? If your income statement shows all profits, then kudos!
But if you notice a significant drop in net profit, you (or your accountant) will need to dig in to find out what happened.
For example, maybe you went from $15,000 in net profit in April to $7,000 in May and June. First, assess your gross profit. If it’s down, focus on boosting sales. If not, you likely have an increase in operating expenses — meaning it’s time to consider cutting expenses. This is when it can be helpful to compare P&L statements from prior months and years.
Overall business health
When it comes to P&L statements, it is literally about the bottom line, i.e., net profit. When you approach investors or the bank for funding, that is the first number they’ll look at.
A loss may indicate something is off. It could be a one-off problem or a more significant operational issue. Insight into your company’s profit (or loss) equips you to make informed decisions. P&L statements are essential for creating a budget, calculating your working capital, and forecasting future profits.
What Your Accountant Should Look For
A good accountant will know the most important things to analyze in your income statement are:
Comparing prior years to current
Helps you understand how your company is growing
Gross profit margin
Used to assess your company’s financial health
Shows how much money you have left over from product sales after subtracting the COGS
EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization
Shows your company’s operating profit as a percentage of its revenue
Helps you perform industry benchmarking.
Calculated with the formula Operating income / Sales = Operating margin
Shows profits after paying for variable costs of production but before interest and taxes
Indicates profitability through your core operations.
Net profit margin
Ratio of net profits to revenues for a company or business segment
Shows how much profit is generated as a percentage of revenue received
Indicates if your company is generating enough profit from sales and how well you’re managing your operating and overhead costs
One of the most important indicators of your business’s overall financial health
Assessing various metrics on a month-to-month basis
Shows if your key business metrics are improving or deteriorating
By this point, you can see how vital a P&L statement is to your business. And it’s critical that your accountant not only runs the report for you but analyzes it sufficiently and distills the numbers into actionable data you can use to move your business forward.
Need an accounting partner who will do just that? Contact us today to find out how we can help! Schedule a free consultation or call us at 603-541-7485 today.