The Profit & Loss Statement

The profit and loss statement, also known as the income statement, is one of the three main financial statements your company should prepare quarterly and annually in addition to the balance sheet and cash flow statement.

At a glance, the P&L shows your company’s ability to generate profit during a specified fiscal period. The P&L summarizes revenues, costs, and expenses for that period to arrive at net income. Net income can also be referred to as the bottom line, earnings, or profit. If this number is negative, it would be referred to as a loss.

For your business purposes, the P&L has three main uses. The first is as one of the three required financial statements. Second, it provides a vehicle for internal analysis of your company’s operations. We will discuss that below with a few helpful ratios. Lastly, it is used during tax preparation by summarizing the revenue and expenses to be reported on your annual tax return.

Quick Tip: Calculate ratios & margins to get to an apples to apples comparison

Revenue – Expenditures = Profit

The equation is simple but unfortunately there is just a little bit more to it than that. But don’t worry – no advanced math is required!

Start with your revenues. This is any income during the specified period.
Then determine your Cost of Goods Sold (COGS). COGS includes all costs directly involved in selling a product or delivering a service. This could include labor and parts in a manufacturing business, fresh produce for a restaurant, or sales commissions in a service company. COGS can also be referred to as the cost of sales.
Next deduct operating expenditures or OPEX. OPEX refers to expenses to run your business – meals & entertainment, travel, salaries, insurance, advertising, maintenance, services, office supplies, etc.
Finally, deduct depreciation, or the amount allocated each period to record the loss in value of your fixed assets like equipment and computers.

Now, you’re ready for your calculation:

Revenue – COGS – OPEX – Depreciation = Net Profit

Some helpful ways to analyze the P&L Statement

One way to find insights in the P&L is by calculating margins. Common calculations are gross profit margin, operating profit margin, and net profit margin.

1. Gross Profit Margin

Gross profit = revenue – COGS

Gross profit margin % = gross profit / revenue * 100

The gross margin ratio shows how efficient your company is at producing and selling your goods or services.

2. Operating Profit Margin

Operating profit = gross profit – OPEX

Operating profit margin = operating profit / revenue

Operating profit margin shows how a company manages its indirect costs, or the costs of operating the business outside of sales related costs.

3. Net Profit Margin

Net profit margin = Net income / net revenue * 100

Use your calculated profit margin number to compare periods such as year-over-year (YoY) or month-to-month. You can also use profit margin % to compare to other companies in your industry as a benchmark.

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