When you run a business, there are certain reports you need to understand how to read. One of the most important reports is a profit and loss statement. This is sometimes also called a P & L statement. Basically, this statement shares lots of information you must know about your business. It is one of three financial statements you should be paying close attention to. If you have never seen one of these statements before, or have ignored it, now is the time to learn how to read one the right way. 

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

What is a Profit and Loss Report? 

A profit and loss report is often known as an income statement. Basically, it is a financial statement that shares income, as well as expenses during a specific period of time. This report allows you to compare expenses to income. 

This report is an excellent way to see your business’s profitability in certain areas too. 

Who Prepares the Profit and Loss Statement?

If you have a bookkeeper, they will be the ones preparing the profit and loss statement for your business. Most bookkeepers will give you this report monthly. However, you can also ask for quarterly statements or have them compile an entire year’s worth of information into one. 

If you do not have a bookkeeper, you will need to prepare the profit and loss report on your own. This is simple when you are utilizing an online bookkeeping system. Simply make sure all revenue and expenses are entered for the time period you are running the report for. 

Of course, if you are not using an online bookkeeping system, you will need to do this all by hand. 

The steps for this are as follows: 

  1. Add up all the revenue your business earned. 
  2. Calculate the cost of the goods sold.
  3. Calculate your business’s gross profit/loss. This is done by subtracting the cost of goods sold from the total revenue. 
  4. Calculate your business’s operating expenses. 
  5. Calculate your business’s operating profit/loss. 
  6. Determine if your business has any other income or expenses not included above. 
  7. Calculate your business’s income tax expense. 
  8. Calculate your business’s net profit/loss. This is done by adding your operating profit to any additional income before subtracting other expenses and tax expenses. 

It is a long process by hand. Which is why we love bookkeeping systems so much! 

How to Read a P & L Statement

P & L statements do contain a lot of information. However, that information is what you need to know if you want your business to be successful. So, you really should learn how to read this report the right way. 

1. Define the Business Revenue

The first thing you should do is define the business revenue. This is usually on the top line of the report. 

If your business has multiple revenue streams, this information should be included in detail before being added together. This will allow you to see where your business is thriving and where it isn’t doing as well. 

2. Understand the Business Expenses

Every business has operating expenses. You have salaries, utilities, and benefits, plus many others. It is important to see what your expenses are in relation to your revenue. Expenses that are too high may need to be reined in to increase revenue. 

3. Calculate the Business’s Gross Margin

Not all P & L statements include a line with the gross margin. You can request this line be included though. This line shows the direct costs subtracted from the revenue. Not every business will have this information though.

4. Calculate the Business’s Operating Income

The adjusted revenue of a business is found in this section of the report. It is the revenue that has been adjusted after subtracting depreciation and operating expenses. 

5. Compare the Budget versus Actual Spending

One of the first sections most business owners check is the one that shares the actual spending versus what was budgeted. This is an excellent way to see if you are staying on budget or if your budget needs to be revamped. 

6. Check the Year Over Year

The year-over-year, or YoY, allows you to compare how your business is doing now compared to last year. This can be better than comparing quarter to quarter, where too many variables can exist. 

7. Determine the Net Profit of the Business

The net profit of a business is determined by subtracting the taxes, debt interest, depreciation, and amortization from the operating income. This is the bottom line number everyone looks for. However, it shouldn’t be. Some companies may have a lower net profit due to debts, yet have lots of positive cash flow. 

Now that you know how to read a profit and loss statement, you can fully understand the health of your business. If you haven’t run one of these reports before or don’t know how, it may be time to hire a bookkeeper. Our team can assist you with this task and many others. Contact our office today to schedule a consultation.