Profit and Loss, What does it Mean?
Updated: Jan 20
Understanding Your Profit and Loss Statement
A profit and loss (P&L) statement, also known as an income statement, is one of the primary financial statements that companies issue regularly.
This statement provides an ongoing record of the company’s financial condition. Creditors, market analysts, and investors use these statements to evaluate both the financial stability and the growth potential of the company. Here’s what a profit and loss statement is meant to show.
What Information Does a Profit and Loss Statement Show?
A profit and loss statement is a straightforward presentation of a company’s revenues, costs, and net profit for the time period covered by the statement. Companies will often publish P&L statements annually. Although, some will sometimes choose to publish quarterly statements as well.
The top line of the profit and loss statement is revenue — the total amount of income from the sale of goods or services associated with the company’s primary operations.
The statement also shows the gross profit of the business along with the gross profit margin.
The business expenses are also shown on the statement — rent, cost of goods, freight, and payroll results. This is the net operating income.
The bottom line of the P&L is the net profit, which accounts for outstanding debts, interest payments, additional income from secondary operations or investments, and one-time deductions for extraordinary events (i.e., lawsuits).
All the entries and information shown in the profit and loss statement give specific insight into the cash flow of the company. It shows where the money comes from and how the money is used. It shows whether or not a company is financially fit.
It differs from a balance sheet because it shows the company’s income, expenditures, and profitability over a period of time (rather than just a snapshot up to a certain date).
Why Do Companies Publish Profit and Loss Statements?
P&L statements are published for a variety of reasons. They help convey the inner financial workings of a company, which are interesting to several different parties (both internal and external). Especially if the company is large, business owners may not have a comprehensive understanding of all the company’s financial movements. The profit and loss statement can help to fill in the blanks for them.
The statement will show:
Amount of debt or leverage
Executives can use these statements to establish current business performance, create forecasts for the future, and compare their performance to other companies.
External parties like accountants, economists, and investors also use P&L statements. For example, investors and lenders will use the information in the statement to evaluate the company’s risk level. If the P&L statement reflects little revenue that may not be able to cover loan payments, then the lender is less likely to provide additional funds.
While statements like the Balance Sheet show how your business is doing long-term, the Profit and Loss statement shows how the business is trending. Are you making money? Where can we find expenses to cut? What is your profit percentage? Is it competitive?
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