If you’re like I used to be, you may be a bit “number-phobic,” avoiding your financial statements, but your Profit and Loss Statement (or P&L) is an extremely useful report. Although it can be intimidating at first, there are 5 P&L Statement insights you should pay attention to that hold the key to understanding if your business is growing.
In this article, I’ll walk you through what your Profit and Loss Statement is, and how you can use its insights to make better business decisions.
What is a Profit & Loss Statement?
A Profit and Loss Statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period. You might know it as an income statement – since the terms are synonymous. P&L Statements are usually reviewed annually or semi-annually, but you can review them anytime you want a clearer picture of your company’s financial standing.
Because a Profit and Loss Statement shows changes in accounts over a set period, it holds insights into your company’s general financial health.
Understanding P&L Statement Insights
In short – your Profit and Loss Statement will show you revenue, expenses, and profits:
- Revenue – Cost of Goods Sold = Gross Profits
- Gross Profits – Operating Expenses = Net Profits
Most P&L Statements follow a standard format. At the top, you’ll see an entry for Revenue (aka – your top line) and then Cost of Goods Sold (things like labor, materials, and storage). The difference is your Gross Profit. Gross Profit minus Operating Expense (other expenses like office rent, utilities, office supplies like pens, paper, laptops, a copier, and taxes) tell you the Net Profit. Your Top Line is the same as Revenue (or total sales), and your Bottom Line is Revenue minus all expenses (Net Profit).
Overall, it’s best to get a bookkeeper or CPA to manage your accounting in a program like Quickbooks or Freshbooks. Keeping your Profit and Loss Statement up to date is essential for accurate reporting and making smart business decisions. Microsoft Office and Freshbooks have free Profit and Loss Statement templates that you can use to generate the report on your own.
What can a Profit and Loss Statement tell you?
P&L Statement insights indicate overall financial standing and assist with cutting down on unnecessary expenses, reveal changes in your business revenue and spending over time, and crafting projections.
A Profit and Loss Statement can reveal these key metrics:
- Revenue Growth shows how much Revenue has increased or decreased compared to a prior revenue period of each category of product or service your business offers.
- Gross Profit tells you how much revenue is left after taking into account the Cost of Goods Sold.
- Net Profit Margin tells you overall how profitable you are. It’s calculated by taking the Net Profit as a percentage of the Revenue.
Because a Profit and Loss Statement lists your costs, they’re especially useful for seeing where you can cut down on expenses. By having a clear list of operating costs, you can make data-driven decisions on which expenses aren’t of value to you. If your business is growing or shifting priorities after a downturn, your P&L Statement can help you to contain costs and identify your most profitable products and services.
- Common ways that businesses overspend:
- Contracts for professional services that should be reviewed (like your business insurance policy or that fancy copier that never works)
- Ineffective marketing and advertising
- The wrong office space and other unnecessary overhead or waste
- Staying subscribed to non-essential services
P&L Statements provide valuable information on their own, but the key is to look at changes over different accounting periods. To tell if your business is growing, stagnating, or slowing, you need to compare statements over time. Look at the change, usually year over year, or sooner if you see that your business is growing or shrinking.
Finally, when it’s time to forecast or create a new budget, you can use the lessons you’ve learned from your P&L to plan the upcoming quarter or year. Make sure you refer to your business plan and vision to ensure your finances are aligned with your long-term goals.
Although dealing with finances can be stressful, I hope this article inspires you to dive deeper into your financials. Even a simple Profit and Loss Statement can provide some much-needed information and direction for your business.