Understanding Your P&L Report: What It Is and What It Is not
A question I often hear people ask is, “Why don’t I have more money? My P&L report said I was profitable.”
This confusion totally makes sense if you don’t understand exactly what your P&L report provides (and what it does not provide).
A Profit and Loss (P&L) report – also known as an income statement – is a summary of your business's revenue and expenses during a specific period (usually a quarter or a year).
While your P&L report provides valuable information about your company's financial picture, there are certain things that it does not provide. In this post, we'll take a closer look at what information is and is not included in a P&L report.
WHAT INFORMATION IS INCLUDED IN A P&L REPORT?
Revenue: Revenue refers to the money a business earns from selling its products or services. Your P&L report provides information about your revenue during the specified period.
Cost of Goods Sold: Cost of Goods Sold (COGS) refers to the direct costs associated with producing and delivering your products or services.
Gross Profit: Gross profit is the difference between your revenue and its COGS. This section of the P&L report provides information about how much profit your business is making on its products or services before taking into account overhead expenses. You can read more about determining your profitability (and what to do if you’re not profitable) here.
Operating Expenses: Operating expenses are the indirect costs associated with running your business, such as salaries, rent, and utilities.
Operating Income: Operating income is the profit your business makes after deducting its operating expenses from its gross profit.
Other Income and Expenses: Other income and expenses refer to any income or expenses that are not directly related to your core operations.
Net Income: Net income is the bottom line of the P&L report and represents the profit or loss your business made during the specified period.
WHAT INFORMATION IS NOT INCLUDED IN A P&L REPORT?
Cash Flow: Cash flow refers to the amount of cash your business has on hand to pay its bills and invest in itself. While your P&L report provides information about your profitability, it does not provide information about its liquidity.
Balance Sheet: A balance sheet provides information about your assets, liabilities, and equity. Things like the purchase of assets and payments of loans are captured on a balance sheet, not a P&L, so you may have less money or no money after considering the impact of balance sheet transactions.
Future Performance: A P&L report provides information about your financial picture during a specific period, but it does not provide information about future performance or potential. Future performance depends on a variety of factors, including market conditions, competition, strategy, and management decisions. Setting goals and performing an overall financial analysis on your business or finding Financial Planning and Analysis Support are the best ways to predict future performance.
PARTNERING WITH LIGHTHOUSE ADVISORY
P&L reports can be helpful for a variety of reasons, but they are not the full picture of your business’s finances. If you are looking for a better understanding of your business finances, we’re here for you! Lighthouse Advisory supports clients across the USA of all shapes and sizes to achieve better profitability through a holistic approach to their finances. We’d love to see if we’re the right fit for you. Take action here by scheduling your free consultation.
