Your profit and loss statement (P&L) is an essential financial report that works in hand with your cash flow statement and balance sheet. Also known as an income statement, it provides a summary of your profits and losses including revenue, costs, and expenses. Here we look at what a P&L is supposed to show, and its vital role in helping you understand your ability to produce sales, manage your expenses, and ultimately generate profits.
What Is The Purpose Of A Profit And Loss Statement?
The P&L statement is an essential financial record that provides insights as part of an effective business plan. It tells you the profits and losses generated by your company over a specific period, making it easier to understand your financial health and how well your business is doing. It allows you to compare statements across time periods to spot changes and trends, including:
- Revenues
- Operating costs
- Research and development (R&D) spending
- Net earnings
As a result, you understand how your revenue is impacted by expenses while providing a picture of financial health to stockholders and prospective investors. It is also an effective tool to examine your progress relative to industry benchmarks. Your P&L statement helps you make informed decisions based on trends and find strategies to use your money wisely.
Which Type Of Profit And Loss Statement Is Best?
Profit and loss statements can be prepared using the cash or the accrual method. The accrual method tends to work best for larger businesses as it is more accurate over the long term, recording revenues on the date they are earned and expenses on the date they are spent. The cash method records income and expenses based on when the money is actually received or paid out, making it easier for smaller businesses to track their cash flow.
What Does A Profit And Loss Statement Show?
The typical P&L statement shows the following:
- Revenue: This is the net sales or cash receipts received during the period including money earned or received.
- Cost Of Goods Sold (COGS): These are the costs to deliver services or products for things such as labour, materials, etc.
- Gross Profit/Income: This is calculated by subtracting the COGS from net revenue.
- Operating Expenses: This includes general, selling, and administrative expenses including payroll, office supplies, rent, utilities, etc. as well as depreciation.
- Operating Income: Deducting expenses from gross profit gives you your operating income, the earnings before taxes, depreciation, interest, and amortization. If your operating income is higher than your revenue, you’ll have an operating loss.
- Other Income and Expenses: Not all businesses list this, but it helps to include gains or losses from things such as interest or money earned by selling assets.
- Net Profit: Net profit is the revenue remaining after expenses (gross profit minus total expenses)
How Frequently Should A Profit And Loss Statement Be Issued?
Public companies are required to provide a profit and loss statement along with a balance sheet and cash flow statement quarterly and annually. Often people get the P&L statement confused with a balance sheet. However, your profit and loss statement focuses on changes for a specific period, while your balance sheet is an overview of what’s happening now.
How Is A Profit And Loss Statement Analyzed?
When tackling P&L analysis, it helps to have goals in mind to guide you on the key calculations you need to use. Some tips to help you analyze P&L data include:
- Horizontal analysis: This analysis allows you to determine how your business is performing by comparing data year-over-year. However, it also provides a competitive analysis using industry benchmarks as your point of comparison.
- Financial trends: Comparing metrics to see if you are moving forward or falling behind includes looking at markers such as COGS, to see how cost effectively you get your products or services to market.
- Margins: Your margins tell you how your spending compares to how much you earn, such as your EBITDA margin, and the operating profit, shown as a percentage of your revenue.
- Valuation metrics: You can assess the value of your company based on valuation ratios such as Price-to-Earnings (P/E) ratio, Enterprise Value-to-EBIT (EV/EBIT) ratio, and Enterprise Value-to-Free Cash Flow (EV/FCF) ratio.
Whether it’s looking for opportunities to improve financial health, making your company more attractive to investors, or looking for opportunities to expand, an accountant or Fractional CFO can help you learn how to analyze your P&L statements. Better yet they can provide reports that are easier to digest for your specific purpose.
What Key Team Members Should Be Reviewing The Profit And Loss Statement?
The responsibility for P&L management should be shared. It is an important tool that informs key staff members about your high value drivers to become better at managing costs and reducing operating expenses.
As a result, you should include department leaders as well as anyone managing crucial company projects. So, while your accountant and CFO must be intimately familiar with your profit and loss statements, stakeholders contributing to your operational efficiency have much to gain by looking over how their processes impact the bottom line.
Enlisting financial analysts such as a Fractional CFO can help your company gain valuable insights. They can assess the profitability of your company in hand with the cash flow statement and balance sheet to find opportunities to become more strategic in your use of resources. They can also identify where you tend to earn and lose money and recommend ways to improve your accounting processes to improve efficiencies.
For example, they might help improve cash flow by introducing more payment methods to collect payments sooner, or negotiate with your vendors and suppliers for better payment terms and increased credit. They might also notice inaccuracies related to historical spending data and financial statements that can mislead decisions on cash availability, or note that you are missing costs like subscriptions and travel expenses that create gaps between your predictions and actual spending.
Do All Shareholders Receive A Copy Of The Profit And Loss Statement?
Yes, all shareholders are entitled to receive copies of your financial statements at least 21 days before your corporation’s annual meeting.
Profit and loss statements contain complex, critical financial data to inform your decisions. Having an accountant or Fractional CFO to interpret and offer insight on financial reports based on P&L statements can make it easier to leverage this information to improve profitability by gaining more control over expenses.
Call Intrepidium today to learn about our accounting and Fractional CFO services at 778-800-7976 or click here to schedule a consultation.