Understanding Your Profit & Loss Statement
Understanding Your Profit & Loss Statement
Do you look at your Profit & Loss Statement, or is it a mystery so you don’t open it? If you are intimidated by your Profit & Loss Statement, you have come to the right place. I will help you understand the information presented in your Profit & Loss Statement and what you can do with it.
What is a Profit & Loss Statement?
A Profit & Loss Statement provides a summary of your revenue, costs, and expenses during a particular accounting period (typically a month, quarter, or year). The focus of this statement is to determine whether you have made a profit or a loss over that period.
This is what a standard Profit & Loss Statement will look like:
What Can You Do with This Information?
Once the Profit & Loss Statement is complete, you can take this information and analyze it to see your business’ trends and performance. Here are a few ways to analyze it:
Gross Margin
This shows how efficiently your company is producing your goods or services.
The formula to calculate your gross margin:
Your industry will determine what a good gross margin percentage is. Generally, service-based businesses will have a higher gross margin because they have a lower COGS.
Operating Efficiency
Reviewing your expenses in the Profit & Loss Statement shows where you can lower expenses and where you are able to increase your spending.
Comparing Previous Periods
Comparing current Profit & Loss Statements with previous periods or industry benchmarks can help with better financial decision making.
Importance of the Profit & Loss Statement
For investors, lenders, and business owners, the Profit& Loss Statement is important for assessing financial health and making decisions. It helps with understanding the sources of revenue, the efficiency of operations, and the overall profitability of the company.
If you have any questions about your Profit & Loss Statement, I’d be happy to help you out. You can email me your questions HERE.