The Entrepreneur’s Guide to Understanding Profit & Loss Statements

As a business owner, understanding your company’s finances is a crucial part of growth and success. Without a pulse on your profits and losses, you don’t have a sense of what direction you are heading. So not only do you need to be aware of your P&L’s, but you need to check them regularly to ensure things are on track. Like all reports and analytics, you can’t understand where you currently stand without a baseline or other metrics to measure them against. 

Understand your Profit and Loss Statements

A Profit and Loss statement (P&L), also known as an income statement, displays just that – your business’s profits or what losses you may have incurred. Its primary importance is to show you whether your company made a profit for a period. 

Comparing P&L statements from one period to another can help you see if your business has been making more or less profit over time. You can use your P&Ls to identify many metrics include: 

  • Peak periods of profitability
  • Periods where losses were particularly high
  • Possible opportunities for expansion
  • Costs that may need to be reduced 
  • Opportunities for investment 

And more!

Determining Profits 

How do you determine profit? Sales – Costs = Profit

If your costs to operate the business have been less than the sales made, simply enough, you have made a profit. 

While it’s nice to know if profits have been made, you can also use this information to understand your company’s ability or inability to generate profit by increasing revenue, reducing costs, or both. 

When to review P&L Statements

You can review P&L statements as frequently as you’d like, but we recommend that you deep dive into your statements at least once per quarter. This helps you understand your company’s direction and can help you gauge needed adjustments throughout the year. 

If profits are up, it may be a good time for you to invest in your company or staff or to set aside some extra cash for a rainy day. However, if profits are down, changes may need to be made to keep your business running. And if profits are way up, tax planning is incredibly important!

In addition to quarterly reviews, annual reviews of year-to-year statements are also suggested. You can easily see the big picture if your business is growing or declining. 

What a P&L Is Not

A P&L statement does not equate to cash flow. Your cash balance may be increasing or decreasing, but that doesn’t necessarily mean you have a profit or a loss. Understanding your P&L will help you make sure you are aware of the difference between these two figures and allow you to plan accordingly.

Additional Support From Gift CPAs

If you’re unsure how to review your P&L Statements or don’t understand what they mean, the team at Gift CPAs can help. Schedule your free consultation with our experts today to learn more about how regular P&L Statement reviews can benefit your business. 

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