What is Profit and Loss?

Profit and Loss, commonly abbreviated P&L, is an important component in modeling your company’s profitability and wisely using your business resources. However, P&L is commonly misunderstood. We clear up the misconceptions.

 

What Is P&L and How to Use It Effectively in Your Business

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What is a profit and loss statement?

A P&L statement is one of the most fundamental financial statements every business should generate and use. This statement is one of the clearest indicators of whether your business is profitable; it’s key to understanding the financial health and performance of your company.

Profit Frog makes P&L a cinch. Get started today.

What Does a P&L statement tell you? 

A P&L helps you understand the financial performance of your business. Every business and business owner should be looking at the P&L regularly. The P&L should be reviewed at a minimum on a monthly, quarterly, and annual basis. 

A P&L should be reviewed periodically as a way to understand a company’s underlying financial performance. A few common ways to look at a P&L include:

      • Comparison to a prior period, this could be prior year (for example, looking at year-over-year growth), prior quarter, prior month. This allows one to understand how revenue, expenses, and income have changed compared to prior periods.

      • Trend over time. Look at the P&L for the last 3 months, 6 months, or year by month and see how different line items have changed. It is often helpful to graph key components of the P&L over time.

      • Review the line items of the P&L as a percentage of revenue. For example, you can look to see how much your sales and marketing costs as a percentage of your overall revenue. You can track this over time, and also compare it to other companies in your market.

      • Look at growth rates. An example would be revenue if it grew from $100,000 in 2020 to $200,000 in 2022 it would show a growth rate of 100%. 

    When analyzing the P&L, things to watch for include:

        • What expenses are growing faster than revenue, and why? For example, if cost of goods sold is increasing as a percentage of revenue, is that due to inefficiency or inflation? If the problem is due to inefficiency, how can we solve it? If it is related to inflation, should we increase our pricing? 

        • Sharp increases or decreases in any P&L line item. For example, if revenue dropped substantially in March, why? and what can we do about it?

      • Change in ratios and growth percentages.

       

       

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      Why do you need a P&L statement?

      All companies need a P&L statement. Reasons include:

        • For filing government taxes
        • For raising capital—both debt and equity; investors will ask to see a copy of your financial statements, including the balance sheet, P&L, and cash flow statement
        • For understanding company health and financial performance

      How to prepare a profit and loss statement? 

      A P&L statement is a standard report that every financial software system includes in its list of standard reports. If you are using QuickBooks or some other online accounting software to record your financial transactions, you can generate a P&L within the report section of the software. 

      If you are using an outsourced bookkeeping service, they should be able to provide you with a P&L at any time. Finally, If you are tracking your revenue and expenses using a spreadsheet tool such as Excel or Google Sheets, you can find free P&L templates available within the template library for each of these tools. 

      The process of preparing a P&L consists of aggregating all of the activity in each of your accounts. For example, if you have a revenue account that has 100 transactions, you will aggregate the total value of the accounts and record that as your revenue for the period being analyzed. 

      How do you calculate P&L?

      P&L is calculated by subtracting COGS and operating expenses from total revenue. The resulting number, if positive, equals profit (if negative, loss).

      How often are profit and loss statements calculated?

      Most companies generate a P&L statement on a monthly or quarterly basis. Typically, companies do not record all transactions in the accounting system until after the month has ended. 

      Once all entries have been recorded for a certain time period, you can generate a final P&L. For example, say you want a P&L for the month of September 2022. If on September 5th you have not recorded all expenses for the month, your P&L would be incomplete. 

      An example of an expense that might be late is travel expenses because your sales person has not submitted the receipts for the $2,000 in travel he incurred in September. 

      Who uses a profit and loss statement?

      P&L statements are used by business leaders, investors, banks, and finance departments. Each of these groups wants to understand the underlying financial performance of the business—and the P&L will assist with understanding these details. 

       

       

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      Profit and Loss FAQ:

      Is P&L the same as an income statement? 

      Yes, a P&L or Profit and Loss Statement is the same as an income statement. It is one of the 3 main financial statements that businesses use. The P&L statement provides information about a company’s revenue, Cost of Goods Sold (COGS) and expenses over a certain period of time. Usually a P&L is for a month, a quarter, a year period. 

      What is another name for a profit and loss statement? 

      Other names for a Profit and Loss statement include:

        • P&L
        • Income statement
        • Statement of financial results
        • Revenue and expense statement
        • Income and expense statement
        • Statement of profit and loss
        • Earnings statement
        • Statement of operations

      How do I do a P&L in Excel?

      A P&L in Excel is normally done with the time periods in the columns and the accounts down the rows. The below table shows what a P&L might look like in a spreadsheet software tool such as Excel or Google Sheets. In a spreadsheet tool, you would use the function options to add and subtract the different parts of the P&L together to come up with Net Income. 

      (Don’t worry: Profit Frog saves you from spreadsheets and makes P&L super easy)

      P&L Example

      What are the 3 financial statements? 

      The three most common financial statements are as follows:

        • P&L Statement – This statement is made up of company revenue and expenses for a set period of time.
        • Balance Sheet – List all of your company’s assets (things you own) along with all liabilities (People you owe) along with any equity (ownership) if you have in your assets at a certain point in time. A balance sheet is called a balance sheet because it is a balance of your accounts at a certain point in time and in order to balance your assets will equal your liability + owner’s equity or in other words what you own (Assets) will be funded through liabilities (who you owe) and equity (money you invested in the company).
            • Cash flow from financing: includes money from a bank loan or money raised from investors
                • Cash flow from investing: includes purchases of long-term assets such as a truck or investments in securities (stocks or bonds)
                • Cash flow from operations: the day-to-day running of your businessCash Flow Statement – The cash flow statement shows all your cash movement for a certain period of time (cash inflows and outflows). A cash flow statement is typically divided into three sections which are:

      What is more important—P&L or balance sheet?

      Both the P&L and balance sheet are important, but they each serve different purposes. A balance sheet can help you understand areas of your business that you would not understand by looking at the P&L only—and vice versa. 

      For example, the balance sheet will allow you to see the Accounts Receivable (AR) balance at a point and time, and could make you aware of an increasing AR balance—which is a sign your customers are either not paying you, or taking longer to pay you. 

      The AR balance is not something you can see on the P&L, and so you would not be aware of this issue. The P&L can also alert you to trends and concerns that would not be apparent by looking at only the balance sheet. 

      A healthy business should look at the 3 main financial statements on a regular basis: the P&L, Balance Sheet, and Cash Flow Statement. 

      What is the difference between cash flow and P&L?

      Most companies recognize revenue and expenses in accordance with Generally Accepted Accounting Principles (GAAP). GAAP requires recognizing revenue and expenses when the benefit is received—not when the cash is paid. 

      A good example would be an annual software subscription for Microsoft Office. The subscription costs $120.00 for one full year of software use. When you pay for the subscription, $120 in cash will be paid, and your cash will be reduced by $120. However, only $10 will appear as an expense on your P&L. This is because you will use the benefit of the annual subscription over the next 12 months and so you will expense $10 per month until the $120 is used. 

      This is why it is important to have a P&L, balance sheet, and cash flow statement, as each gives you a different snapshot of your business’s financial performance. 

      Is COGS a business expense?

      Yes, along with operating expenses, cost of goods sold is a business expense. Operating expenses plus COGS equal total expenses for your business.

      Can I prepare my own profit and loss statement?

      Yes, if you track all of your revenue, COGS, and operating expenses, you can generate your own P&L statement using the formula given above. 

      Profit Frog customers can easily generate profit and loss statements. Beyond merely generating the statements, our users can dynamically model profitability based on adjusting different factors such as COGS, operating expenses, sales volume, and more. Doing so allows them to plan for a variety of scenarios and be ready for whatever comes their way. It’s active risk management made easy for small businesses.

      About Profit Frog 

      Profit Frog is the leading small business forecasting software. We allow small businesses to model profitability based on different scenarios so they can make sound financial decisions in an ever-changing landscape. By planning for many different scenarios, you can strategically navigate your business to the most profitable outcome while avoiding risk.

       

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