Running a business means having to become a whiz with paperwork. One document you’re going to want to get comfortable with, quick, is your profit and loss statement. What is this, exactly? Let’s break down how to read a profit and loss statement.
Wait, What is a Profit and Loss Statement, Anyway?
Great question! A profit and loss (P&L) statement is a financial document that tells you your revenue, costs, and expenses during a given time. Commonly, P&Ls are reviewed on a quarterly or yearly basis. But some businesses look at them from month to month.
P&Ls are so helpful because they tell you, at a glance, how you’re doing when it comes to generating profit and managing expenses. As powerful as one statement is, what’s truly eye-opening is watching the numbers change over time. Comparing P&Ls should be on your to-do list, because it helps you constantly keep a finger on the pulse of your business.
Don’t confuse a profit and loss statement with a balance sheet or cash flow statement. A balance sheet tells you a company’s assets, liabilities, and shareholder equity. And a cash flow statement tells you the amount of cash (or cash equivalents) coming into and going out of a company.
Reviewing the three statements together can tell you a lot about the health of a company. In other words, one document alone can tell you many things, but it can’t give you the full picture.
How to Read a Profit and Loss Statement Like a Pro
Now, let’s get onto the good stuff. How can you make sense of your P&L statement? To be clear, every business’s P&L statement might look different depending on who prepares it for you, what kind of tool/software they’re using to draft it up, and your own business.
However, most statements cover the same basics, at the very least. So, let’s go over those.
Revenue is probably one of the first things you’ll see on the statement. This is the money you made from sales before any deductions.
Cost of Goods Sold
Think of this number as the costs associated with creating your products/services. For example, if you’re running a food truck, a direct cost might be the take-out boxes you serve your food in.
Gross margin might also appear as gross profit. This is going to be the difference between your revenue and cost of goods sold. Pay close attention to this number. It’s going to help you understand how much money you have left over for all of your business’s additional overhead expenses.
And speaking of overhead expenses…
This represents your overhead expenses, which are different from your cost of goods sold. Those numbers are not included here. Think of this as the stuff you pay for to keep the lights on — like rent and utilities.
Your operating income is your earnings before interest, taxes, depreciation, and amortization — also known as EBITDA. This is your profitability, before a few numbers are subtracted from it.
This is the amount that you have already paid or should expect to pay in the future.
Total expenses will include everything: cost of goods sold, operating expenses, income taxes, etc.
This might also appear as net income or net earnings. When businesses talk about their “bottom line,” this is it. This is what your business earned after all is said and done. Is the number negative? You’re losing money. Is it smaller than you want? You need to find a way to decrease expenses or increase revenue, or both.
You might also see net profit expressed as a percentage, in addition to the numerical dollar amount.
As we said, how exactly your statement looks will be different from other companies. But these figures should be there.
How Can You Interpret Your Profit and Loss Statement?
Your P&L statement is a simple way to understand:
- How much you’re earning.
- How much you’re spending.
- What’s left at the end of it all.
It can reveal where you’re winning and where you need to improve.
Are high expenses eating into your bottom line? Audit them to see where you might be able to save. Are you paying a lot of money for a fancy email marketing software you don’t even use? You might consider canceling your subscription. Does your landlord keep raising the rent? See if you can negotiate better terms. How about your inventory management — is that costing you money you don’t even know about?
If your expenses are as minimized as they can be and you’re still not walking away with that much money, then it’s time to reevaluate your business’s offerings. Are you not charging enough? Do you need to expand your product/service line? Are you not retaining customers? A loyalty or rewards program can help with that.
Ultimately, it’s up to you — the business — to figure out ways to improve your finances. Your profit and loss statement will reveal any weak points so that you can address them accordingly.
Certain tools and technology can help you along the way — like a POS system. Streamline your sales, inventory, and customer management. Bring everything under one roof. Work more productively, more passively, and save money along the way.
Ready to take the next step? Contact True POS today and get a free quote.