What is a P&L Statement?

A profit & loss statement (P&L statement, or P&L) is a financial report that shows a company's revenues and expenses during a certain period of time. By subtracting expenses from revenue in a P&L, a business sees whether enough money is coming in to generate a profit, or if expenses exceed what the business is bringing in, leading to a loss.

In addition to reflecting company profit or loss during a given time period, a P&L helps businesses track growth, monitor expenses, identify trends, anticipate cash flow and other issues, and make informed business decisions.

Learn how businesses use P&Ls, when you should create one, and the importance of what P&Ls reveal about business financial health.

Understanding a P&L statement

All U.S. public companies are required to file a P&L (called an income statement in accounting terms) quarterly and annually, but P&Ls are important for all sizes and types of businesses. The reason: A P&L provides a clear snapshot of whether a business is making money during a month, quarter, year or other timeframe.

A P&L offers a view of this because it is a record of all the money coming in and going out over a set period, including sales and other revenue, costs to produce goods or services, everyday expenses like rent and wages and other costs like taxes or depreciation.

For example, here is how some businesses might use a P&L:

• Marketing agency: Review its quarterly P&L to compare contractor expenses with client revenue and measure profitability.
• Manufacturer: Track whether product sales are keeping ahead of raw material costs, labor, and factory overhead.
• Restaurant: Monitor if food and beverage sales cover ingredient costs, staff wages, and rent to confirm profitability.

A P&L statement is part of a trifecta of important financial reports, along with a balance sheet and cash flow statement, that many companies and investors use to gauge business financial health. Understanding how each one contributes to the picture of a company's financial health may make it more clear how to use a P&L effectively.

• P&L: Shows how revenues and expenses lead to profit or loss.
• Balance Sheet: Shows what a business owns, what it owes and what's left over.
• Cash Flow Statement: The movement of money in and out of the business and whether a company has enough cash on hand to pay its bills.

Why a P&L statement is important

Regular creation and review of P&Ls help a business track if it’s making or losing money, but that’s not all. Routinely creating and examining a P&L may help a business:

• Measure profitability, because it reveals if a business is bringing in more money than it is spending during a certain period of time.
• Inform decision-making by showing the state of revenues and expenses. This information can impact spending, sales and marketing, pricing, hiring, funding and business decisions.
• Identify trends, since it tracks revenue and expense performance both at a point in time and over time. This can illuminate company trends such as increasing expenses, softening sales or other critical trends.
• Anticipate problems while there is time to act. For example, a P&L may provide advance notice of an impending cash flow crunch, a supply shortage, the need for new machinery or equipment or other developments.
• Control costs by highlighting areas where spending is high, making it easier to locate where to cut or optimize.
• Secure funding or investment opportunities by generating a source of proof of financial performance for banks, lenders or investors evaluating the business.

Non-public businesses typically prepare P&Ls monthly or quarterly to track profitability and inform decisions. Annual P&Ls are standard for tax filings and year-end reviews.

Types of P&L statements

There are three common types of P&Ls, and the right one for a business to create depends on how much detail a business needs and whether the statement needs to show past performance or project future results. Here are the three major types and when they might be used.

The information in a P&L depends on the accounting method a business uses. A cash accounting approach records income when received and expenses when paid, so the P&L reflects cash flow status. Accrual accounting records income when earned and expenses when incurred; this type of accounting gives a clear view of operational performance, but not of when money actually enters and leaves the business.

Steps to create a P&L statement

Whether a business is preparing a single- or multi-step income statement, understanding a few key definitions may help.

1. Revenue (or sales): The total income a business earns from its operations. It represents only the money "coming in," and does not account for expenses or overhead.
2. Cost of goods sold (COGS): The direct costs to create or deliver a business's products or services. Examples include raw materials and contractor fees.
3. Gross profit: The profit remaining after subtracting COGS from revenue.
4. Operating expenses: Ongoing business costs that are not included in COGS, including rent, wages, supplies and depreciation.
5. Net income (also known as net profit): The money a business is left with after all expenses are subtracted. This is the final "bottom line" on an income statement. 

The steps below show how a business could create a multi-step P&L. To craft a single-step P&L, combine steps 2 through 7 into one line to calculate total revenue minus total expenses. A pro forma P&L would use estimated numbers for a given time period in the future. Work with your tax or financial advisor for help with this process.

Step 1: Pick a time period.
Choose a month, quarter or year.

Step 2: Calculate revenue.
List all business revenue.

Step 3: Calculate COGS.
Include the direct costs of making your product or delivering your service, such as materials, parts, and labor.

Step 4: Find gross profit.
Use this equation to arrive at gross profit: Revenue – COGS = Gross profit

Step 5: Calculate operating expenses.
Add up rent, wages, utilities, marketing, and other operating expenses.

Step 6: Subtract or add other income or expenses.
Include income or costs not from regular operations, such as interest, equipment sales or one-time fees.

Step 7: Subtract taxes.
Subtract taxes owed for the period, using either actual amounts or estimates.

Step 8: Find profit (net profit).
Subtract all expenses (including operating costs, other items and taxes) from gross profit to get net profit.

Examples:

Annual P&L

Manufacturing Company

• Revenue: $2,400,000 from custom furniture sales
• COGS: $1,440,000 for wood, hardware, and production labor
• Gross Profit: $960,000
• Operating Expenses: $576,000 for rent, utilities, admin salaries, and marketing
• Other Income/Expenses: –$48,000 equipment repair expense
• Taxes: $96,000
• Net Profit: $240,000

P&L: An important tool for planning and decision making

A P&L statement helps businesses track profit and loss and understand their driving factors. Knowing if a business is making or losing money is essential for planning and long-term business viability. The revenue and expense trends revealed in a detailed P&L can guide choices on sales, spending, hiring, and nearly every other part of running a business. With this insight, businesses also gain early warning of potential problems in time to act. A clear forward view from a P&L can strengthen the case to partners, investors, suppliers and other important stakeholders.

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