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December 29, 2022
A profit and loss statement (P&L), also known as a profit and loss report, is a financial document that summarizes the revenues, costs and expenses incurred during a specific period.
The purpose of this profit and loss report is to provide businesses and other stakeholders with an accurate and detailed assessment of their financial performance over a given period.
It also provides information on how much money has been earned through the sale of products or services, as well as the main costs associated with running operations, paying back debt and paying taxes.
A P&L statement can be used by companies of any size, in any industry, to evaluate the financial impact of a business’ operations. And once you learn how to read this statement accurately, you’ll have a good idea of the efficiency and profitability of any company that prepares one.
Your P&L statement is composed of two main parts, the income earned section and the expenditures section. At the top, you’ll see the period of time this report covers, then the income and expenditures will be listed below.
Here are a few of the items you’ll notice on a profit and loss report:
This includes sales revenue and other sources of income, such as interest earned on investments or rental income.
This is your total revenue (listed above), minus the cost of goods sold.
Expenses can include operational expenses like utilities paid out, employee salaries and wages, or taxes paid out during that accounting period.
In a detailed P&L statement, additional information about each expense category may also be provided, along with totals at either day-level granularity or month-level, depending upon how you want to analyze your business’ financial performance.
If your business has loans, you’re likely paying interest. On your profit and loss report, that interest must be accounted for, even though this technically isn’t an “expense” in the traditional sense.
This is the value your purchased assets, like real estate and equipment, lose over time.
This section reflects the final amount of money left over, once every revenue item has been added and every liability subtracted.
Depending on how your business is using the P&L statement, you may include more detail under each category, by listing individual expenses, or you may produce a higher-level report that focuses only on the value of each main category.
The process of preparing a profit and loss report is a bit tedious, but with the help of an accountant, it can become an almost automatic part of your financial oversight process.
Here’s a quick overview of how this crucial document is prepared:
A properly prepared profit and loss statement helps you track your small business’ performance over time. By comparing each period’s results over the course of quarters or years, you’ll notice potential problem areas, like increasing costs in one section, or declining revenue. That allows you to make quick adjustments — before these issues significantly impact your bottom line.
Profit and loss reports also help business owners make better-informed decisions about the future of their company. By analyzing your past and current data, you can see which activities maximize your profits, and which expenses bring down your overall profitability.
If you’re considering expanding your operations, adding a new product line or increasing production, for example, your profit and loss report can offer insight into the long-term impact of that decision.
A third benefit to preparing and reviewing your profit and loss reports is the opportunity to discover areas of boosted performance. Is a particular product or service significantly more profitable than others? Is a particular time of year better for business? Or do your costs fluctuate seasonally?
Noticing these trends — which may not be evident in any other kind of report— can give you a significant profitability boost and an edge over your competitors. For a leg up on cost-effectively managing your business’s P&L reports on a an ongoing basis, you may wish to consider financial services outsourcing.
Our team is made up of seasoned professionals who bring years of industry experience to the table. You gain a trusted advisor who understands your business inside out.
Say goodbye to the hassles of hiring, training and managing in-house finance teams. You will never have to worry about unexpected leave of absence or retraining new employees.
Whether you’re a small business or a global powerhouse, our solutions scale with your needs. We eliminate inefficiencies, reduce costs and help you focus on growing your business.
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