How to Read a Profit and Loss (P&L) Statement

Transforming a dream into a thriving business requires ingenuity, planning, and tireless dedication. But to truly elevate your venture and foster growth, there's another essential skill to acquire – understanding the profit and loss (P&L) statement. 

Navigating the financial landscape is critical to keep your company thriving, and while you don't need to be an accounting expert, understanding the basics is vital to your business's success.

Even if you have trusted professionals in your corner, being well-equipped to decipher the information provided ensures you remain in control. By learning to read P&L statements (also known as income statements), you'll have the foundation to confidently make informed decisions for your business.

Don't wait any longer! Read this quick and easy-to-follow guide to unlock the keys to understanding the profit and loss statement today.

What is a P&L statement? 

A P&L statement is a key financial document that reports on the status of a company’s financial health. It’s regularly produced by accountants for owners, entrepreneurs, and investors to assess the health of a business.

What Does P&L Stand For? 

P&L stands for profit and loss, which are the principal factors assessed in a P&L statement. Knowing how to read a profit and loss statement simply requires looking for the net income of a business over time.  

What sets it apart from other financial statements?  

A profit and loss statement reports on a company’s overall revenue and expenses over a certain period of time, usually monthly, quarterly, or by fiscal year. It is an income statement reporting directly on a company’s net profits. A single look at a profit and loss statement should tell you if the company is profitable or not.

Cash Flow Statements 

There are two other key financial statements businesses regularly use to report and assess their finances: the cash flow statement and the balance sheet. The cash flow statement, unlike the P&L, is not interested in net income but in the regular flow of cash in and out of the business. 

A business needs a reserve of cash on hand to make purchases and pay bills. Even with high net profits, a company with poor or inconsistent cash flow will run into trouble when bills are due, and they find themselves without any cash on hand to pay with. 

Profit and Loss vs. Balance Sheet

While cash flow statements and P&L statements both report on finances over time, a balance sheet is intended to report on a given moment in time. It’s a snapshot of the current chart of accounts. 

The balance sheet includes a comprehensive report of the current state of a company’s finances, balancing assets and liabilities. Reading the balance sheet and the snapshot it provides is most helpful when comparing it to previous balance sheets. 

What goes into a profit and loss statement?

A lot of different ingredients go into a profit and loss statement. The document should give you a full picture of your income over a set period of time. Ensure you’re familiar with the common bookkeeping terms and financial language you’ll find in a P&L report.  

Revenue

The top line of the P&L statement should be your total revenue. This is the money you’ve received from all of your sales. How much money have you made? 

Cost of Goods Sold (COGS)

The next step is the cost of goods sold, or COGS. COGS includes the raw materials and production costs of your products.

Gross Profit

To find your total gross margin of profits, subtract COGS from your revenue. This is the gross profit you’ve earned through sales. 

Operating Expenses

After revenue, the P&L statement reports on your operating expenses organized into various categories. This is where you include all your normal business expenditures outside the costs of the goods themselves. 

This includes both direct and indirect costs of operation. Direct costs are the immediate operation costs, like employee wages and the materials associated with COGS. Indirect costs include everything else, from rental costs to utilities and insurance premiums. 

Net Operating Income 

Your net operating income represents your total income after you’ve taken out your operating expenses. These are your earnings before interest, taxes, depreciation, and amortization. 

Other Expenses

Profit and loss statements should include other expenses like interest expense, income taxes, depreciation, and amortization, but they should be counted separately. These aren’t operating expenses, but they still have to get paid. 

Net Loss or Profit 

The bottom line of the P&L statement is the final, most important total. This is your net loss or profit as a business. That means it’s the total revenue minus all of your expenditures. 

How to Read a P&L Statement

At first glance, a detailed P&L statement may look intimidating. How do you figure out how to read a profit and loss statement when it’s just a long list of revenue and expenses? 

The critical thing is to note the separate categories. Find the number totals at the end of each section before you get into the weeds and read the lists themselves. 

You should be able to find the most essential takeaways at the beginning and the end of the statement as well. The top line will be your total revenue or sales, and the very bottom line of the P&L statement will be your net income after all of your expenses have been subtracted from profits. 

These are the essential sections you should find when reading a P&L statement: 

• Gross profits, which will be the total of your revenue minus the cost of goods sold (cogs) 
• Operating expenses split into separate categories
• Non-operating costs like taxes and interest expenses
• Net profits after subtracting total expenses. 

Importance of Reading a P&L Statement Accurately

What is a profit and loss statement for if you don’t know how to read it? Your business plan is only as good as the data it’s based on, and the profit and loss statement is a key source of data for understanding your business. 

The bottom line of the P&L statement tells you if your company is profitable or not. Once you have a sense of the larger picture, you can go into the details to see where you can trim expenditures or increase profits. 

How 1-800Accountant Can Help With Your Bookkeeping  

It’s important to know how to read a profit and loss statement, but you don’t have to know everything about accounting and bookkeeping. In fact, it’s better to have an expert who can help you review your financial situation. 

Don’t hesitate to seek out professional help with your small business bookkeeping if you’re not sure how to read P&L reports or if you want a second opinion. Get an expert from 1-800Accountant to show you how to analyze a profit and loss statement and make more efficient choices for your company.