A profit and loss statement, also called a P&L or income statement, shows what your business earned, what it spent and what was left over for a period, usually a month, a quarter or a year. It's the first report I'd tell any business owner to read each month, because it answers the most basic question in business: are we making money?
The format is the same for almost every small business. Once you know the five parts, you can read any P&L in a few minutes.
A profit and loss statement example
Here is a simplified monthly P&L for a small restaurant. The numbers are made up, but the layout is how I'd set one up for a restaurant.
| Line | Amount | % of sales |
|---|---|---|
| Food sales | $60,000 | 80% |
| Beverage sales | $15,000 | 20% |
| Total sales | $75,000 | 100% |
| Food cost | $19,500 | 26% |
| Beverage cost | $4,500 | 6% |
| Total cost of goods sold | $24,000 | 32% |
| Gross profit | $51,000 | 68% |
| Wages and payroll taxes | $25,500 | 34% |
| Rent | $7,500 | 10% |
| Utilities | $3,000 | 4% |
| Card processing fees | $2,250 | 3% |
| Marketing | $1,500 | 2% |
| Repairs and maintenance | $1,500 | 2% |
| Insurance | $1,000 | 1.3% |
| Other expenses | $1,250 | 1.7% |
| Total operating expenses | $43,500 | 58% |
| Net income | $7,500 | 10% |
The five parts of a P&L
1. Sales (revenue)
The top line is what you earned from customers. Split it the way you want to manage the business. In the example, food and beverage are separate, so the owner can see each one's margin. Sales tax you collected doesn't belong here; it's money you owe the state.
2. Cost of goods sold
The direct cost of what you sold: food and drinks for a restaurant, fuel and merchandise for a gas station. My post on cost of goods sold explains what belongs in this section and how to calculate it.
3. Gross profit
Sales minus cost of goods sold. Gross profit is what's left to pay for everything else. In the example, $51,000 of every $75,000 in sales, or 68%, is left after food and beverage costs.
4. Operating expenses
The costs of running the business that aren't tied directly to each sale: wages, rent, utilities, insurance, marketing and so on. For most small businesses, wages and rent are the two biggest lines.
5. Net income
Gross profit minus operating expenses. This is the bottom line, the profit the business made for the period. A negative number means a loss.
Some P&Ls also show other income and expenses, such as interest, below operating expenses and before net income.
The numbers worth checking every month
Reading a P&L mostly means comparing each number with an earlier period or with sales. These are the checks I do first:
- Compare each line to the same month last year, and to last month, to spot changes.
- Look at cost of goods sold as a percentage of sales. If it rises without a price increase from suppliers, look for waste, theft or recording errors.
- Look at wages as a percentage of sales, especially in restaurants and hotels, where labor is usually one of the largest costs.
- Check gross margin by product line, if your chart of accounts splits sales that way.
- Look for large "Other" or "Uncategorized" amounts. They usually mean transactions weren't categorized properly.
Profit is not the same as cash
A P&L can show a profit while the bank account shrinks. Loan principal payments, owner draws, equipment purchases and inventory build-up all use cash without appearing as expenses on the P&L. That's why I send clients a balance sheet and a cash flow report along with the P&L each month.
Whether income and expenses are recorded when cash moves or when they're earned and incurred also changes the picture. I explain the difference in cash vs accrual accounting.
A P&L is only as good as the books behind it
If transactions are miscategorized or accounts aren't reconciled, the P&L will look precise and still be wrong. A clear chart of accounts and monthly bank reconciliations are what make the numbers trustworthy.
Want a P&L you can trust every month?
I've spent 38 years in accounting, and I deliver a monthly profit and loss statement, balance sheet and cash flow report to every bookkeeping client, working online from Weatherford, Texas. See my bookkeeping services or book a short intro call.