Running a small business means wearing many hats, including understanding your company’s financial health, which is crucial. A Profit & Loss (P&L) statement, also known as an income statement, is a vital tool in this process.
About The Profit & Loss Statement
This financial document captures your company’s revenues, expenses, gains, and losses over time. Simply put, it’s a report card of your business’s financial performance, and incidentally, it is the most popular and most common financial statement in any business plan because it’s the statement that lenders and investors will go to first when they review your business plan.
Breaking Down the Profit & Loss Statement
- Revenue: This is the total amount of money your company earns from selling goods or services. Let’s say you own a record store and sell $20,000 worth of records in a month. That $20,000 is your revenue.
- Direct Costs (Cost of Goods Sold): These are the costs directly linked to producing your product or delivering your service. In the record store example, this would include the cost of buying the records you sell.
- Gross Margin: Expressed as a percentage, this is what’s left after subtracting your direct costs from your revenue and then dividing by revenue and multiplying by 100. It’s the profit you make on your product or service before accounting for any other business expenses.
- If your record store had revenue of $20,000 and direct costs of $10,000, your Gross Margin would be $10,000, representing a Gross Margin percentage of 50% ($10,000 / $20,000 * 100%). This percentage indicates that 50% of the revenue remains as profit after covering the direct costs of goods sold.
- Operating Expenses: These are the costs necessary to operate your business that aren’t directly tied to production. They might include rent for your record store space, utilities, marketing costs, and salaries for your staff.
- Operating Income (EBITDA): This stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s calculated by subtracting your operating expenses from your gross margin. It gives a picture of your profitability from your regular business operations.
- Interest: These are the costs related to any loans or lines of credit your business has taken out. For instance, if your record store borrowed money to upgrade its sound system, the interest on that loan would fall under this category.
- Taxes: These are all the taxes your business owes, from sales tax on your records to income tax on your profits.
- Net Profit: This is the final line of your income statement, showing what’s left over after all costs and expenses have been accounted for. It’s your “bottom line” and a critical measure of your business’s profitability.
Pro Tip! Remember, while net profit gives an important snapshot of your business’s financial health, it doesn’t necessarily mean there’s that amount in cash in the bank. For a more comprehensive picture of your cash flow, you’d also want to review your cash flow statement.
Regular Profit & Loss Statement Analysis
Analyzing your P&L statement each month is essential to identify changes and address potential business challenges. If direct costs are rising faster than revenue, or if cash flow is problematic, consider sourcing new, affordable vendors or renegotiating with current ones.
Similarly, monitor revenue changes to pinpoint areas where increased spending may be beneficial, like marketing and advertising.
At Ceterus, we offer top-of-the-line benchmarked reporting and accounting services to help you understand your business’s finances. Schedule a call with us today to learn more about how we can help you.