by Brandon Boushy
A business should know for any given period whether the company’s ability to pay its bills is in question. The easiest way to do this is by having a real-time update of your profit and loss statement. This financial statement will help you easily identify your gross revenue, net revenue, and profit margins to see your financial standing.
We’ll help you understand P & L accounting. Click on any of the links to jump ahead:
Get ready to find out what a P&L statement shows.
What is a Profit and Loss Statement (P&L Statement)?
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A profit and loss statement is a document that companies file quarterly and annually to explain revenue and expenses. You might also hear these documents called by names like:
- P&L statement
- Income statement
- Statement of financial results or income
- Statement of profit and loss
- Earnings statement
- Statement of operations
- Expense statement
- Operating statement
- P&L report
These records are used by the government, lenders, and financial analysts to analyze how a company can improve its profit through cost reductions, increased investment, and increased revenue. A Profit and loss statement uses either an accrual or cash basis. The P&L helps the team measure the company’s financial health.
Are P&L Statements Required?
Yes. When you file your taxes, the IRS will require a profit & loss statement, as well as a cash flow statement and a balance sheet for your business during a specified period of time.
(I would love to provide you with more information on the laws regarding tax requirements, but I am not licensed to offer legal or financial advice. You should go to the IRS to gather information about handling your taxes or consult a licensed accountant or other tax professional.)
Accounting P&L Statement Example
| Company Name | 2023 | 2022 | Year over Year Change |
| Sales or revenue | $4,206,900.00 | $1,234,567.00 | 240.76% |
| Operating costs: | |||
| Cost of goods sold | $2,000,000.00 | $700,000.00 | 185.71% |
| Selling, general, and administrative (SG&A) | $350,000.00 | $120,000.00 | 191.67% |
| Research and development (R&D) | $175,000.00 | $60,000.00 | 191.67% |
| Interest on financial products | $4,200.00 | $4,200.00 | |
| Other operating (income) expenses | $5,000.00 | $2,400.00 | 108.33% |
| Total operating costs | $2,534,200.00 | $886,600.00 | 185.83% |
| Operating profit | $1,672,700.00 | $347,967.00 | 380.71% |
| Interest expense excluding financial products | $484.00 | $465.00 | 4.09% |
| Other income (expense) | $239.00 | -$35.00 | |
| Earning before income tax | $1,672,455.00 | $347,467.00 | 381.33% |
| Income taxes | $351,215.55 | $72,968.07 | 381.33% |
| Net profit | $1,321,239.45 | $274,498.93 | 381.33% |
Here are some other line items you might see on corporate income statements:
- Equity in profit (loss) of unconsolidated affiliated companies
- Profit of consolidated and affiliated companies
- Less: Profit (loss) attributable to noncontrolling interests
- Profit (attributable to common shareholders)
- Profit per common share
- Profit per common share — diluted
- Weighted-average common shares outstanding (millions)
- Basic
- Diluted
- Cash dividends declared per common share
Profit and Loss Statement Template
We’ve created a template for you to use to create a profit and loss statement. Download it below.
How do Companies Measure Financial Performance?
There are three main financial statements that organizations use to measure performance:
- P&L Statement: The profit and loss statement is simply revenue and other earnings minus expenses during a specific period of time to get a net profit or loss.
- Balance Sheet: The balance sheet provides a snapshot of the assets and liabilities on a specific date, normally the end of the quarter or fiscal year. Comparing the assets (especially liquid assets) to the liabilities helps investors project whether the company can meet its financial obligations.
- Cash Flow Statement: The third document shows cash flow from operating income and expenses, investment decisions, and financing decisions. If cash flow is positive, your company is typically in good financial health, but if it is negative, you may have issues.
Profit and Loss Statement vs Balance Sheet
Profit and loss statements show a company’s total revenue, total business expenses, and profits over a quarter or fiscal years. Meanwhile, balance sheets show the balance of liabilities and assets for the last date of the reporting period. Investors can compare the balance sheet to prior years to measure changes in the assets and liabilities.
Comparing changes in revenue, business expenses, and total profits with assets and liabilities can give you a good idea where a company is going.
Income Statement vs Profit and Loss (P&L) Statement
The terms income statement and profit and loss statement refer to the same document. A net income statement or P&L statement will normally include the items in the example profit and loss statement below.
Profit & Loss Statement vs Cash Flow Statement
A profit and loss statement often has non-cash expenses like depreciation that are allowed in accrual accounting, while a cash flow statement only focuses on actual cash received or sent during the same period. This can change the financial outlook of a company because sometimes a huge depreciation can make a profitable business look like a loss.
What is Net Income?
Net income is simply revenue minus expenses, interest, and taxes. It is the most common number that people look at after a company’s revenue because it shows how effective you are at turning sales revenue into take-home profits. Net Income might also be referred to as a net profit or net loss depending on the financial results during a certain period. Net income is also used in paychecks.
What are Operating Expenses?
Operating expenses on a profit and loss statement are the costs associated with running a company. You can calculate the operating expenses by adding up the following:
- Cost of Goods Sold/Costs Associated With Sales
- Marketing
- Sales, General, and Admin (SG&A) Expenses
- Rent and Utilities
- Technology Costs
- Research and Development
Business owners need to manage expenses to reach their target profit margin. How you manage the operating profit margin determines how analysts and lenders will evaluate your business operations’ effectiveness.
How to Compare Profit and Loss (P&L) Statements
Hey, guess what! I am actually allowed to provide advice on how to compare a profit and loss statement to another P&L statement. I’ll refer to NYU Stern’s table of public companies’ margins throughout this section. If you’re comparing a financial statement to another document, you’ll want to compare the following:
Company’s Revenues
Each profit and loss statement will have the gross revenue at the top. If you’re comparing year over year of the same company, you want to see revenue growing. When comparing financial statements from two companies, you’ll want to know which revenue is higher and which is growing more as a percentage.
Cost of Goods Sold (COGS)
A P&L statement will show how much each company spends to create their products or services. Whichever spends less as a percentage of revenue is doing a better job at controlling their financial position, but they may be losing opportunities if the business owner is focusing on financial strength over people.
Gross Profit
The gross profit is simply the revenue minus cost of goods sold. The higher the gross profit as both a dollar amount and percentage, the better the revenue statement reflects on the business.
Gross margins can range anywhere from about 10% to 100% (banks have virtually 100% because their costs are not directly related to selling a product or service), but most successful business owners aim for a 50% or higher gross margin.
Sales, General, and Admin (SG&A)
Small businesses have operational costs that aren’t tied directly to the companies’ total income. For instance, an accountant charges you based on the complexity of your books, not how much you sell during a fiscal year. Any company spending over about 16% in SG&A may want to look at where expenses are incurred to reduce the percentage.
Operating Profit
This is the expense directly related to operating the company. This line on a P&L statement will give you a good idea of whether your small business could cover the monthly payments on a loan. If your operating margins are less than 10-15%, you should look at your total expenses and see where you can improve your company’s profitability.
Interest Expense
If this item is on a P&L statement, it means the company is borrowing money. That’s perfectly normal, but if the interest expenses are more than the operating profit, then at some point the business will either fall behind on the loans or other expenses.
Net Income
This is the part of the profit and loss statement that shows the gains or losses from the company. If you divide this number by the revenue, you get the net profit margin. Depending on your industry, this percentage could range from -20% to +30%, with an average of around 8.9%.
Accrual Method Accounts vs Cash Basis
One other important aspect to understand about P&L accounts is the cash and accrual basis of accounting. A P&L account that uses cash basis accounting will only account for spending when they buy or sell products, services, or company’s assets.
P&L in accounting also allows companies to use the time of invoice as the basis for when the cost or revenue is earned. When this occurs, you’ll have accounts receivable and accounts payable that will impact your company’s assets.
As you’ve seen from public company failures in the banking industry, a business may be forced to close if they reach a specific point where their assets and cash flow don’t cover their liabilities. That’s why it’s critical you have somebody to advise your P&L management that knows what they are doing.
Now It’s Time to Hold Yourself Accountable
We’ve discussed examples of P&L statements, how to perform a horizontal analysis of P&L in accounting, and other useful information to better understand P&L responsibilities. Now it’s up to you to use the knowledge to help measure and increase your profit margins.
While PNL finance measures from revenue to net income, many business owners find it easier to manage a business using the formula:
Revenue – Profits = Expenses
This lets you look at how much money you want to make and what you have to do to achieve it.
What financial metrics and reports do you find most useful for running your business?
