//Profit and Loss Report: A Beginners Guide

Profit and Loss Report: A Beginners Guide

how to read a profit and loss statement

It is also known as the income statement or the statement of operations. The revenues, expenditures, and expenses of a business for a given period are compiled in a P&L statement. The profit and loss or the cash flow statement are the financial statements that public firms are required to release quarterly and annually. An income statement is one of the three important financial statements used for reporting a company’s financial performance over a specific accounting period. The other two key statements are the balance sheet and the cash flow statement. Understanding the different financial statements for your business is essential for understanding the movement of money in your company.

how to read a profit and loss statement

As you can see our total revenue, including all of the reimbursable expenses, was around $579,000. In our case we wanted to track fees for our work, revenue to cover reimbursable expenses, and then the revenue related to marking up reimbursable expenses. We did this in both the revenue and the Cost of Good https://www.apzomedia.com/bookkeeping-startups-perfect-way-boost-financial-planning/ Sold sections so we could check each category to make sure that we correctly invoiced for all of our expenses. This section covers almost all of the money coming into the company. As an architecture firm there are a few different categories of revenue so we broke down this income into 7 line items.

The components of a profit and loss statement

After all, it tells you how much money your business is making (or losing). To calculate your net profit or loss, simply subtract your total expenses from your total revenue. If your revenue is greater than your expenses, you have a net profit.

This can quickly eat into your profits and put your business in a precarious financial position. By understanding the different components of a P&L statement, you can get a clear picture of your business’s financial health. You can use this information to make informed decisions about where to allocate your resources and how to grow your business. This is the money that your business has earned from sales, services, or other sources. Revenues simply reflect the total amount of money that your business has brought in. Expenses are the costs incurred by your business in order to generate revenue.

Difference Between the Profit and Loss Statement Vs Balance Sheet

The cost of goods sold is the amount you spend on materials to operate your business. For example, purchasing inventory to manufacture or sell products, or machinery to perform a service for customers. If each team members understands the relationship between the sales and their wages and time, we can better manage our staff and everyone can contribute to creating an efficient design process.

how to read a profit and loss statement

COGS is the direct cost of producing the goods you sell, like raw materials and labor. The P&L statement can be used to assess a company’s financial health and performance. It can be used to identify trends, such as whether a company is making or losing money. The statement can also be used to make decisions about where to allocate resources. Most bookkeeping for startups companies will also have an investor relations (IR) website, like HashiCorp’s
ir.hashicorp.com with links to their recent
filings like this page hosting HashiCorp’s quarterly results. Generally, it’s easier to use EDGAR, but an IR website will often espouse
the company’s preferred narrative through their earnings calls and press releases.


Because that 3% could add up quickly, we eventually stopped accepting credit card payments. This line item is clearly the biggest revenue source and the root of every design business. You are selling your time and expertise and all revenue related to your services should end up here. ‍When we submitted projects to the building department for review, they would be assessed an intake fee – typically around 10% of the total permit fees. ‍This would be all the little things that you pay for in order to complete project work. If you send drawings to a printer that would be a reimbursable cost.

What is a good margin of profit?

Net profit margins vary by industry but according to the Corporate Finance Institute, 20% is considered good, 10% average or standard, and 5% is considered low or poor. Good profit margins allow companies to cover their costs and generate a return on their investment.

In this example, we see that June was the best month in terms of sales, gross profit, net income, and profit margin. Upon review of the other numbers, we see that this might have been due to seasonality (see more below) and/or increased marketing. This statement goes by many names, including P&L, income statement, earnings statement, revenue statement, operating statement, statement of operations, and statement of financial performance. Balance sheets are built more broadly, revealing what the company owns and owes as well as any long-term investments. Unlike an income statement, the full value of long-term investments or debts appears on the balance sheet.

The income statement will list all of your expenses across all categories, including facilities costs, general & administrative costs, IT costs, and anything else that the company paid for. At the bottom of the operating expense section, these are added up to get the total expense amount. This is then subtracted from the gross profit, to get the net operating income. A P&L statement shows your business’s revenues and expenses over a specific period of time (usually one month or one quarter).

It includes the revenue earned from the primary business activity of the entity along with the non-operating revenue. When you have a high gross margin, that means that it costs you very little to deliver your product or service and you’ll have the majority of the money from every sale left over to cover your expenses. If you’re looking for an easier way to update or build an income statement, you can download a free profit and loss template or skip the spreadsheets and use planning software such as LivePlan. Below is a video explanation of how the profit and loss statement (income statement) works, the main components of the statement, and why it matters so much to investors and company management teams. The balance sheet displays your company’s assets and liabilities during an exact period of time. For example, the first day in the previous month or the last day in January of the previous year.

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    Martin Solonick

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