Understanding the P&L

Sep 7, 2022

The P&L statement is the starting point for any business owner who wants to grow and succeed. It is a clear snapshot of the financial health of your business, and it will help you make better decisions in the future.

This article is here to help you understand the basics of the P&L statement. We’ll look at how it works and how you can use it to better understand the financial health of your business.

What is a P&L Statement?

The P&L statement, or profit and loss statement, is a financial report that shows the income and expenses of a business. It breaks down how much money you’ve made, as well as how much money you’ve spent. The result is either a profit or a loss depending on whether your income or expenses were higher.

The P&L statement can also be called the income statement, which shows the revenue and expenses of the business. It does not include balance sheet information such as assets and liabilities. That goes on a different financial report.

Why Do I Need A P&L Statement?

The P&L statement is the backbone of any business owner’s financial knowledge. It provides an easy-to-understand snapshot of your business’s financial status and the information that you need to make the right decisions. You can use it to compare your financial performance over time, or you can see how it compares to other businesses in similar industries.

You can also use it to get a good idea of how much money you need to make a profit in your business. It should also be used to allocate resources and measure your expenses. Since it shows the income and expenses of your business, you can use it to see what areas are profitable, and which aren’t.

How Do I Make Sense of A P&L Statement?

The P&L statement is broken into different sections: Gross Profit, Expenses, Net Operating Income, Other Income, Other Expenses, Net Other Income, and Net Income.

Here is a quick breakdown:

Gross Profit – The amount of money you made from your business sales. This includes your revenue from the sale of goods, services, or both. If a customer buys a case of wine and pays $100 for it, that is $100 in gross profit. Some companies will also include the sales tax they collected as part of gross profit.

Expenses – The amount of money you spent on business expenses. These amounts are deducted from your Gross Profit in order to calculate your Net Operating Income.

Net Operating Income- The amount of money your business made (or lost) during normal operating activities. This is your Gross Profit minus your business Expenses.

Other Income – Income that doesn’t come from the operations of your business. For example, if you sell an old piece of equipment that has a high profit margin but isn’t a typical business sale, this income would be classified as non-operating income or Other Income.

Other Expenses – These are expenses that occur outside of normal business operations. For example, if you run a laundromat and need to repair your equipment, that’s a normal business expense. However, in that same business, if you incur interest expenses, for example, that would be considered an Other Expense because it has nothing to do with your normal day-to-day business operations.

Net Other Income – This is the amount of your Other Income combined with your Other Expenses. If your Other Income is greater, you’ll have a positive Net Other Income. If your Other Expenses is greater, you’ll have a negative Net Other Income.

Net Income – The amount of profit after all expenses have been paid, and all income has been accounted for. This includes both regular Income and Other Income, and regular expenses as well as Other Expenses.

The P&L statement is an essential tool for any business owner who wants to grow and succeed. If you want to better understand the financial health of your business, contact me at cori@fatcatbookkeeping.com

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