How to Read a Profit & Loss Statement Without Being an Accountant

You don't need to become an accountant to understand your business.

But if you own a company, there's one financial report you should become familiar with:

Your Profit & Loss Statement.

Often called a P&L or income statement, this report can help show how your company performed financially over a specific period.

Let's simplify it.

Revenue

At the top is revenue.

This generally represents the income generated by the business during the period.

Business owners frequently focus heavily on this number.

And understandably so.

But revenue is just the beginning.

Cost of Goods Sold

Depending on your business, you may have costs directly associated with delivering your product or service.

Subtracting these costs from revenue helps determine gross profit.

Gross Profit

Gross profit can provide valuable insight into the economics of what you're selling.

Looking at gross profit as a percentage of revenue can also help you monitor margins over time.

If revenue is increasing while your gross margin is declining, that's something worth understanding.

Operating Expenses

Next comes the costs of running the company.

These may include:

Payroll.

Rent.

Advertising.

Insurance.

Software.

Professional services.

Utilities.

Vehicles.

And other overhead.

These expenses can significantly affect what remains after generating revenue.

Profit

Eventually, we reach the number every business owner wants to understand:

What did we actually make?

But don't only look at the final number.

Compare it with previous months and years.

Ask why it changed.

Did revenue increase?

Did expenses increase?

Are margins improving?

Is payroll consuming a larger percentage of revenue?

What trends are developing?

Turn Reports Into Business Information

A P&L shouldn't simply be a document you receive and file away.

It should help you ask better questions about your company.

That's a major part of the SBC Bookkeeping & Consulting approach.

Accurate bookkeeping helps create reliable reports.

Experienced support can then help you understand the information behind those reports.

SBC Bookkeeping & Consulting believes business owners shouldn't have to wait until tax season to discover how their company performed.

Know your numbers throughout the year.

Because when you understand what's happening financially, you're better equipped to decide what happens next.