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A profit & loss (P&L) statement is one of the most fundamental and most important financial documents for your business. It is fairly simple, but knowing all the nuances can help you allow the document to guide your business planning.
A profit & loss statement is a financial document that displays a company’s revenues, costs, and expenses across a specified period of time. These are often created every year, fiscal quarter, or month.
In a very simplistic sense, P&L statements provide a quick summary of whether a firm earned a profit or lost money for the time period in question.
Every publicly-traded company releases a P&L statement quarterly and annually along with 2 other crucial financial statements: balance sheets and cash flow statements.
It is functionally the same as an income statement, and the 2 terms are often used interchangeably for this type of document.
Knowing whether your firm is making or losing money is pretty important information. Because this document gives a very short answer to this question, the P&L statement is highly prized by many, including potential lenders and shareholders.
As the owner of a small business, you can use a P&L statement to understand what contributes to your profit or loss. Armed with this data, you can investigate how to improve your profitably.
Banks and other lenders put a lot of emphasis on your P&L statement in deciding if you are a good investment or not. This doesn’t mean your business has to show a profit to be worthy of funding, but you should be able to explain why a loss occurred during the time period of the statement—perhaps you hired more staff or operate a seasonal business.
Several key bits of information are expected on a P&L statement.
Importantly, you will want to keep records of both your most recent P&L statements, as well as any completed in the past. By comparing and contextualizing this information, you can better understand how your small business is performing over time.
Revenue is your cash in-flow, which usually comes in the form of sales.
The “cost of goods sold” is a metric of the money needed to make each sale, such as the price of raw materials or direct labor costs. Also referred to as “direct costs,” you don’t include indirect expenses like advertising.
Subtract COGS from revenue and you will calculate your company’s gross profit. You can use this number to quickly understand how much money you earn off every sale, but it doesn’t include other operating expenses.
Operating expenses are all the costs that aren’t directly involved in the sale of a product, such as utility bills, rent, salaries, or marketing.
Your net income is your revenue minus COGS and operating expenses. To get an even better understanding, you should also deduct taxes and any other expenses your business has paid over the time period. If your net income is positive, you’ve earned a profit. If it is negative, you’ve had a loss.
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