Demystifying Your P&L
Think of your business’s financial reports as its "report card." And the most important one is the Profit & Loss (P&L) Statement. So, what is it? A P&L statement (also called an Income Statement) is a financial report that shows you a simple but powerful thing: did your business make a profit or a loss during a specific period of time? It summarizes your total income and total expenses to give you the ultimate bottom line.
Why is your P&L so important?
It’s Your Report Card: It tells you if you’re actually making money.
It Helps You Make Decisions: See an expense that’s too high? A revenue stream that's not performing well? Your P&L helps you find areas to improve.
It’s Required: It's one of the key financial documents that banks or lenders will want to see if you ever apply for a loan.
The P&L Glossary: Simple Terms, Big Meaning
To help you understand your P&L, here's a quick glossary of the most important terms you'll see.
Revenue (or Sales): This is the "top line" of your P&L. It's the total amount of money your business earned from selling your products or services.
Cost of Goods Sold (COGS): These are the direct costs of creating the products or services you sold. For example, if you sell handmade goods, this would include the cost of materials and labor. For a service-based business, it might be the cost of a subcontractor or other direct costs.
Gross Profit: This is the money you have left over after subtracting your COGS from your Revenue. It shows how profitable your core business operations are before all the other expenses.
Operating Expenses: These are the day-to-day costs of running your business that are not directly tied to a product or service you sell. Think of things like rent, utilities, marketing, and office supplies.
Net Income (or Net Profit): This is the "bottom line." It's the final amount of money your business has left after subtracting all of your expenses from your revenue. If this number is positive, you have a profit! If it's negative, you have a loss.
Understanding your P&L is the key to a healthy business. If you’re ready to get a crystal-clear picture of your finances and feel confident about your business’s future, let’s chat. A professional bookkeeper can not only prepare these statements for you but also help you understand what they mean so you can make smarter decisions.
