The majority of people who start their own business do so because they are passionate about their work and the industry in which they operate. This means that they typically don’t know much about accounting. Because of this, these entrepreneurs will have trouble interpreting the profit & loss statement (“P&L”) that is necessary in running a business successfully. Here’s a guide to understanding your company’s profit & loss statement.
The formula for a profit and loss statement is quite simple. It is sales minus costs equal the profit or loss. The profits will be illustrated by a positive number, while the losses will be shown as a negative number. The rest of the statement is breaking out sales or costs into more detail and adding the subtotals together to arrive at the total profit or loss. The top of the statement is where the sales are typically shown. Costs are displayed on the statement below the sales and then the profits are shown at the bottom. As you look down the statement, you could see a host of subtotals, but the formula remains the same, sales minus costs equals profit or loss.
Profit and loss statements can become very confusing for those without an accounting background when alternative names are used. Even though alternative names might be used on the P&L, everything is still the same, including the formula. Sales can also be referred to as income revenue, or gross receipts. Costs are sometimes referred to as expenses or expenditures. The total profit or loss can also be referred to as net income.
A profit and loss statement might have your company’s sales broken down into different sources. Some companies decide to divide their sales into multiple categories and then provide a sales total on the P&L statement on a separate line. For example, a restaurant could break down its sales into three categories: dine-in, take-out, and catering. It is common to list different income sources, such as interest, as a separate line item.
Costs can also be broken down into multiple categories on a profit and loss statement. There are endless ways to break down a company’s costs on a statement. Once you get underneath the sales section, everything else is regarding costs. For example, a company might break up its costs into categories such as overhead, labor costs, and material costs.
One of the best ways to divide your costs on a profit and loss statement is to put costs directly related to the delivery of your product or service in one category and all other costs into another category.
Costs that might not be associated with the delivery of your product or service would include employees who sell the product or service, the fee for the accountant who creates your company’s profit and loss statement, and the compensation for the company administration. These costs are typically referred to as selling, general, and administrative costs, or SG&A.
Many business owners file their profit and loss statements without reading them, specifically because they don’t know how to read them. Having an understanding of a P&L statement makes it easier to run your business and can help you be successful as a business owner.
Contact the experienced and friendly staff at Tobin & Collins to discuss your company’s profit and loss statement today. The office in Hackensack, New Jersey can be reached at 201-487-7744.