Put simply, profit and loss reports give you a snapshot of business earnings and expenses over a particular period of time. By looking at their P&L statement, business decision-makers can learn about the current state of their business and decide what actions to take to improve their business position.
Below, we give you a short and sweet guide to making the most of your profit and loss (P&L) statement.
What is a P&L Report?
A profit and loss report is a financial statement that summaries the expenses, costs, and revenues of an organization during a particular period of time, often a quarter or year. Along with the balance sheet and cash flow statement, the P&L is one of three financial statements that every public company issues quarterly and annually. By comparing P&L statements from different periods of time, organizations can get a sense of their operating costs, changes in revenue, and other meaningful numbers that provide a glance into the financial wellbeing of an entity.
Understanding P&L Reports
In general, a profit and loss report is divided into two sections – revenue and expenses. Revenue refers to income from primary and secondary activities, while expenses refer to all expenditures. Revenue can include numbers like total sales and can be broken down into individual products or product lines. Expenses can typically be divided into the cost of goods sold (for example any raw materials) and operating expenses.
Organizations typically look to reduce costs, meaning they pay attention to rising figures for material costs or find more efficient ways to produce their products.
How to Make a P&L Report
To make a profit and loss report, there are a few things you must first identify.
Figure out a format
A P&L can be created using accounting software or even a typical Excel spreadsheet.
Choose a time frame
Interested in looking at a monthly, quarterly, or annual time frame? All you have to do is choose.
For most small businesses, revenue equals sales or goods sold. However, revenue can also include things like licensing agreements, tax returns, or rent. Each revenue source gets its own line on your profit and loss statement. Once you’ve listed each source, total them for your gross revenue. Make sure to break each source down by month—you’ll want the calculated totals of each revenue source for each month, not just the sum total of all revenue.
Calculate direct costs
Direct costs, or costs of goods sold, refer to how much it costs to make the goods you sell.
Calculate gross profit
Subtract your direct costs from your total revenue to get your gross profit.
Calculate operational and nonoperational expenses
Operating expenses (OPEX) are any expenses necessary to your business that aren’t direct costs, or any money that doesn’t go directly into creating goods or supplying services. Depending on the type of business you run, these could include monthly utilities, business internet, and phone plans, hardware and equipment, marketing costs, office supplies, building and equipment repairs and maintenance, and anything else that impacts your day-to-day business operations.
Get your bottom line
Subtract your total expenses from your gross profit to get your net profit.
The Future of Finances
The P&L statement helps organizations stay in control of their profitability. To take financial reporting up a notch, cloud FP&A platforms such as DataRails can assist with creating automated financial reports. And the best part is that you don’t have to change the way you work to improve your processes. DataRails is an Excel-based solution, meaning that you can leverage your existing spreadsheets, models, and intellectual property that is built into your Excel spreadsheets. Keep using the interface you are familiar with while simultaneously boosting your capabilities. DataRails fits itself to you, not the other way around.