How to Read a Profit and Loss Statement The Motley Fool

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how to read a profit and loss statement

If you’re working in an Excel spreadsheet to build and review your P&L statement, be sure to double-check your numbers to make sure you didn’t miss anything or accidentally change a formula. Sometimes, manual data entry can lead to mistakes that affect your bottom line. It’s good to know if a surge in profit came from gradual growth or a specific event or promotion. Once you know whether your business has made money or not, it’s a good idea to take a closer look at your income streams and expenses. We’ve created a single-step profit and loss statement for an imaginary business—Bench Bakery, a small pastry shop.

What are the five key components to a P&L statement?

  • Revenue. Revenue is reported first on a profit and loss statement for small businesses and includes all income items.
  • Cost of goods sold (COGS)
  • Expenses.
  • Gross profit.
  • Net profit or loss.
  • Horizontal analysis.
  • Vertical analysis.

These records provide information about a company’s ability (or lack thereof) to generate profit by increasing revenue, reducing costs, or both. The P&L statement’s many monikers include the “statement of profit and loss,” the “statement of operations,” the “statement of financial results,” and the “income and expense statement.” Creditors may find income statements of limited use, as they are more concerned about a company’s future cash flows than its past profitability. Research analysts use the income statement to compare year-on-year and quarter-on-quarter performance. The profit and loss (P&L) report is a financial statement that summarizes the total income and total expenses of a business in a specific period of time.

Net Income

Understanding what cused that swing (at least part of it was G&A costs doubling from ‘20 to ‘21)
will make the path to profitability much clearer. Under the cash accounting method, revenue and expenses are only recorded when payment changes hands. This can provide a skewed snapshot of the business since it may have a lot of accounts payable or accounts receivable. It’s more appropriate for small businesses due to the simplicity of accounting. As we can see, the other income includes income that is not related to the company’s main business. It includes interest on bank deposits, dividends, insurance claims, royalty income etc.

how to read a profit and loss statement

The Profit and Loss Statement (P&L), also known as the Income Statement, is an important financial tool. It summarizes your company’s revenues (net sales) minus costs and expenses (i.e., Cost of Goods) incurred during a specific operating period. This report gives a quick overview of the financial health of the bookkeeping for startups firm and is important to review it frequently to track how the company is doing. I would look at this report on a monthly basis and compare it to our annual budget. At the end of each year I would also utilize this report to project the following year’s revenue and expenses and build out a new company budget.


Some costs like rent and utilities might be fixed, while others like supplies or wages could vary. We read profit and loss statements top to bottom, so we’ll go through this one line by line. Aside from identifying potential issues with your company’s finances, the P&L statement can also spot areas of growth and opportunity. If a particular department or aspect of your company is bringing in more revenue than the others, you can strategize to exploit this and continue to grow in the following months or years. On the other side, if there are struggling areas of your business, you can dig deeper and try to identify the reasons why those areas are struggling or remove them completely from your business model.

  • Revenue is the total income generated by your business from its activities.
  • She’s passionate about helping people make sense of complicated tax and accounting topics.
  • His main concern is to read what is being stated and use it to make his decisions.
  • We know you are passionate about your business and that you may not feel comfortable interpreting your monthly financial reports.
  • You can set the time frame for this report within Quickbooks Online or other accounting software – either for monthly, quarterly, year-to-date, or annual reports.
  • Overall I think this was the right choice so we could instead spend our time on billable work.

Or we would do a fun activity for the group, like a team dinner, an escape room, or even that trip to Japan that I mentioned above. Typically those expenses would end up showing up on the following year’s P&L statement. This is the most important number on this report and should almost always be positive considering the goal of a company is to make money.

What is the income statement?

If your company sells both subscriptions and physical products, for instance, those sales will be listed as separate types of revenue. If you’re like most business owners, you probably don’t spend a lot of time poring over your financial statements. But if you want to stay afloat and grow your business, it’s important to have a basic understanding of your profit and Loss (P&L) statement. As a business owner, one of the most important tools you have at your disposal is your profit and loss statement. Also known as a P&L or an income statement, this document provides a clear and concise snapshot of your business’s financial health. The expenses section lists all the money your business has spent over the specified period of time.

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