How to Read a Profit and Loss Statement

As a business owner you should be looking at your profit and loss statement at least monthly. But what are you even looking at?

The profit and loss statement is also called an income statement. It summarizes the business‘s revenue and expense activity and provides a net income or net loss, aka the bottom line. This number is important for a number of reasons. It shows you if you‘re making a profit, helps you determine the amount of taxes you’ll be paying, and is an important number lenders use to determine your eligibility for loans,

The profit and loss (also known as a P&L) starts with the revenue in the business. Cost of Goods Sold (COGS) are then listed under the revenue. The total COGS is subtracted from the total revenue to reach the gross profit. Gross profit is the tentative profit in a business after direct expenses from providing the services and/or products are accounted for.

Following the gross profit number comes operating expenses. These expenses are not directly related to fulfilling the sales in the business. Operating expenses are things like rent for an office building, utilities, advertising, etc.

once operating expenses are listed generally other abnormal income and expense items are listed. The income and expenses listed below operating expenses are not items that are related to the business activity. These might include things like interest income.

Finally the net profit or net loss is listed. This amount is the bottom line. The amount of sales revenue left after all the expenses are subtracted or the amount that expenses exceed revenue.