Your company’s profit and loss (P&L) statements tell an important, yet an incomplete, story about your business’s financial health. While a profit and loss statement can be a little intimidating to unacquainted business owners, when you cut out all the jargon it’s a fairly simple and straightforward document.
In short, profit and loss statements paint a picture of your company’s fiscal situation: in the background is the business’s total revenue, with increasingly smaller expenses such as interest charges and workers’ compensation in the foreground. At front and center is your net profit, which is your company’s actual profit after working expenses have been accounted for.
Depending on the industry and size of the business, a profit and loss sheet can be plain and simple or a whirlwind of seemingly unintelligible numbers. To help you see through the fog, we put together this quick guide to mastering the P&L statement.
What Is A P&L?
Your business’s profit and loss statement is a monthly summary of its income and expenses. For any given month, your P&L will inform you, your creditors, or your investors about whether you made or lost money.
Our readers often ask us: what does a profit and loss statement look like? Understanding what is a P&L begins with knowing what a P&L statement looks like and, in turn, what it’s made of. There are five key components of a business’s P&L, which are:
- Cost of goods sold (COGS)
- Revenue (sales/turnover)
- Gross profit (revenue subtracted by COGS)
- Net profit (gross profit subtracted by expenses)
Your business profit and loss statement use the indicators listed above to provide critical information about your finances. For instance, a P&L tells you whether your business is operating profitably, what percentage of the sales price covers the cost of producing the product, and what share of the sale price covers your business’s fixed costs.
Similar to your business’s operating cash flow, your P&L statement informs readers about changes in accounts over a set period. For example, taking total revenue and subtracting it by COGS tells you what your gross margin is, which gives you an idea of how much money you have remaining after you’ve covered the cost of making the product in a given month.
How to Read A P&L
Despite seeming like a mishmash of numbers and accounting jargon, a profit/loss statement shouldn’t come across as intimidating. Once all the accounting terms are understood, learning how to read a profit and loss statement should come naturally.
Decrypting a profit and loss sheet begins with understanding its constituent terms. Here’s a brief glossary of more advanced terms found on a company’s P&L:
- COGS: The expenses, in time and materials, that go into producing a product.
- OPEX: Operational expenditures (i.e., all required operational costs not included in COGS)
- EBITDA: “Earnings Before Interest, Taxes, Depreciation, and Amortization.” A metric used to determine profitability for companies with many tangible assets and a high amount of debt.
- Depreciation: The losses incurred by the degradation in the value of a business asset over time (i.e., the lost value of a company vehicle).
- Profit: While every business owner understands the term “profit” loud and clear, it’s important to remember that profit accounts for what’s left over after you subtract all expenses from your gross revenue. This is the final, and most important, line in a P&L.
When reading your P&L, don’t get bogged down by the numerous subtotals found throughout the chart. Ultimately, what’s most important is the metric at the foot of the table: net profit. Just as total revenue will always be found on the top line of the P&L, your net profit (i.e., leftover funds after expenses are subtracted from revenues) will always be found at the bottom.
The expense section of the profit and loss statement displays all the itemized expenses and general operating costs of the business. This section will also factor in interest charges, depreciation, taxes, and amortization to, finally, give you your business’s bottom line: net profit. A positive net profit indicates that you’ve earned more than you have spent.
How to Make a P&L
A fast and easy way to make a P&L is to find a statement template online and input your company’s information with spreadsheet software like Excel or Google Sheets. However, accounting software like FreshBooks and Intuit QuickBooks can automate the process for you and ensure an error-free preparation.
However, not everyone’s interested in automating their accounting processes. If this sounds like you, you’ll have to learn how to make a profit and loss statement manually, which should ultimately answer one fundamental question: has your company produced a profit or a loss over a given period?
To draft a quarterly profit and loss statement for small business owners, follow these necessary steps:
- Prepare your company’s quarterly revenue
- List your company’s quarterly expenses
- Separate expenses that count as the cost of goods sold (COGS)
- Take overall revenue and subtract expenses to get EBITDA
- Subtract interest, amortization, depreciation, and taxes from EBITDA
- The sum is your net profit, which should be listed at the bottom of the statement
If your net profit is positive, then congratulations—your business operated at a profit over the quarter.
Example P&L Statements
To help you get a feel for how to read and produce a P&L statement, there are plenty of sample statements available online for your convenience. We put together a short list of examples below which can help you prepare your statement:
- P&L Statement Sample #1 from Western Australia SBD Corp.
- P&L Statement Sample #2 from Hands On Banking (Wells Fargo)
- P&L Statement Sample #3 from the Corporate Finance Institute
- P&L Statement Sample #4 from the Edward Lowe Foundation
P&L Statement Templates
If you feel prepared to get started making profit and loss statements for your business, consider using any of the template sheets listed below. These templates include all of the information required of a P&L statement minus your company’s financial information (which you have to plug in yourself).
- P&L Statement Template #1 from Microsoft Office 365
- P&L Statement Template #2 from Vertex42
- P&L Statement Template #3 from FormSwift
- P&L Statement Template #4 from Smartsheet
The templates above can be downloaded in .xls form, which requires spreadsheet software like Microsoft Excel or Google Sheets to open and edit.
Making A P&L When You’re Self-Employed
It’s important to understand how to do a profit and loss statement for self-employed people. Freelancers, independent contractors, and owners of sole proprietorships can derive many key insights from their P&L statements if they keep a good record of them, such as whether their net earnings are improving quarter after quarter.
Creating a profit and loss statement for self-employed people shouldn’t be any different than creating one for any other business. However, there are a couple of changes that can be incorporated into your P&L that can make your financial outlook a bit clearer at a glance:
- Add a Tax row after the Net row, and include the sum you will set aside for taxes (read about federal and state self-employment taxes here)
- Add a Pay-Out row, which is the amount you will pay yourself for your work (i.e., either a pre-set sum or a share of the net income)
For self-employed people, we recommend using online accounting software to help streamline your financial management systems. Life as a freelancer or self-employed person is busy enough, so having your accounting taken care of by an automated service can pay dividends in the long-run through saved time and peace of mind.
Your P&L: An Overview
Like your company’s bank statement, your P&L provides key information for stakeholders in your company that determine whether it’s operating profitably and sustainably. This is why public companies in the United States are bound by law to include P&L statements in their quarterly financial disclosures.
For small business owners and self-employed people, profit and loss statements give you the opportunity to reflect on your business’s financial health over a given period. Based on the information that a P&L provides; business owners can make critical decisions regarding where to cut expenses.
A profit and loss statement not only helps business owners make internal decisions about their future, but they can also help creditors and lenders judge their creditworthiness. In short: a company’s profitability over time can be determined simply by comparing quarterly or annual P&L statements, which is an invaluable asset when trying to form a complete picture of your business’s finances.