how to read a profit and loss statement

Cost of goods sold, or COGS, represents what it costs your company to deliver the goods or services. This includes direct expenses such as materials, labor, and shipping but doesn’t include indirect expenses such as rent or utilities. A profit and loss statement (P&L) is an effective tool for managing your business. It gives you a financial snapshot of how much money you’re making (or losing) and can make accurate projections about your business’s future. With a cash flow statement, you can see the types of activities that generate cash and use that information to make financial decisions.

” Finding ways to decrease your cost of goods sold will ultimately increase your bottom line and profit margin. This may seem obvious, but you should review your sales first since increased sales is generally the best way to improve profitability. If you see a month was particularly good, try to remember why so you can duplicate what you did in the future. So adding up revenue from operations (Rs.3436 Crs) and other income (Rs.45 Crs), we have the total revenue for FY14 at Rs.3482Crs.

Section 2: Cost Of Goods Sold / Direct Expenses

Every business will run into legal issues from time to time and it is important to have someone to help guide you through those. Based on recommendations we purchased both a Disability and a Life Insurance policy for the three partners. The idea here is if any one of us got sick, disabled, or passed away, the firm would get an influx of cash to compensate for that partner no longer contributing to the company. In the case of death, the life insurance policy could also be used to buy out that partner’s shares from their family. We offered health insurance, dental coverage, and vision to our employees.

how to read a profit and loss statement

If you sell multiple products or services, you can break them down across multiple product or service lines on your P&L. This can tell you whether certain products or services are more profitable than others and if some are growing while others are shrinking. Also known as gross income or gross margin, the gross profit is net revenue minus the cost of goods sold. Direct costs, also known as cost of goods sold (COGS), are the costs that you incur when you make your products or deliver your services. You don’t include things like rent or payroll here, but you would include the things that directly contribute to each sale. There are two main categories of accounts for accountants to use when preparing a profit and loss statement.

Understanding Your Profit and Loss Statement

The end of the income section of the P&L statement states the gross profit. The gross profit is your company’s profit before the expenses are calculated. Profit and loss statements are generated on a monthly or quarterly basis. At the end of the year, you generate an annual profit and loss statement that gives you the information you need to file your taxes. Typically this would include paying for our tax preparations on an annual basis. We also would occasionally meet with our accountant throughout the year to discuss the financial state of the company and see if there were any opportunities to reduce our tax liabilities.

how to read a profit and loss statement

In addition to looking at individual months or quarters, it’s also important to look at trends over time. This will help you spot any potential problems early on so you can take corrective action before they become too big to handle. For example, if you see that your expenses are gradually increasing while your revenue remains flat, this could be a sign that your business is in trouble. Once you know what to look for on your P&L statement, you can use this information to make better business decisions. For example, if you see that your expenses are consistently outpacing your revenue, you may need to cut back on spending or find ways to increase revenue.

The Profit and Loss Statement

These benefits were better than most other firms of our size, but it was important to our employees and we justified the additional expense as a way to retain and attract the best people. Pretty self explanatory, but any expenses related to purchasing computers and technology equipment would be categorized here. This category can change drastically year-to-year depending on your needs. In 2019 we didn’t buy any new computers and if I remember correctly we only purchased a new power adapter and a couple new mouses. However, in 2018 we purchased 5 new wide screen monitors and two laptops.

Now that we know what a P&L statement is, let’s take a closer look at how to read one. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services. Many people get overwhelmed by the numbers, but a few quick tips and tricks on where to look and why will have you bookkeeping for startups feeling confident and analyzing statements like a pro. This is the amount (Rs.400 Crs) the company would pay to the government; hence, the revenue must be adjusted. After discounting for any nonrecurring events, it’s possible to arrive at the value of net income applicable to common shares.

The P&L statement includes your business name, business address, date, income, COGS, gross profit, expenses, net operating income, and total net income. The following example will break all of these financial factors into detail and show you everything that goes into the P&L statement and how to read a P&L. A P&L(profit and loss statement) is a financial document that demonstrates your company’s profitability for a specific time frame. Your final profit (assuming all went well) or loss is the document created for profit and loss statements. Net operating income is one of the most important lines on the P&L statement, because it shows what’s left over after all your expenses are paid.

How do you analyze a balance sheet example?

  1. Fixed Assets Turnover Ratio = Net sales/Average Fixed Assets.
  2. Current Ratio = Current Assets/Current Liabilities.
  3. Quick Ratio = Quick Assets/ Current Liabilities.
  4. Debt to equity ratio =Long term debts/ Shareholders equity.
  5. Equity = Total Asset – Total Liabilities.

If you’re looking at a profit and loss statement for your practice for the first time, it’s easy to get overwhelmed. Reading a P&L statement helps reveal the profitability of a company at the fiscal year-end. To determine if the business is operating at a loss or making a profit, you need to comprehend line by line of the P&L statement. These are common crossroads founders come to — but to pick the right path, you need to know whether your business is financially stable. This is possible using a document called a profit and loss statement. To operate a business there are certain taxes and fees assessed by local, county, or state jurisdictions.

This example does not show seasonality in expenses, but if it were to show up it could be in increased prices of lemons because of heightened demand and lower production in the summer months. You might also see seasonality in decreased cost of lemons in the fall and winter quarters due to increased production of lemons and lower demand. The accrual method accounts for revenue when it is earned (before the money reaches the bank) and expenses when they are incurred (but before the vendors have been paid). Clearly, the sale of products means the Rupee value of all the battery sales the company has sold during FY14. The company sold batteries worth Rs.3,294 Cr in the previous financial year, i.e. From my experience, the financial statements are best understood by looking at the actual statement and figuring out the information.

Before calculating your total income, determine the time frame you’re calculating for. If it’s quarterly, then add all the sales generated during those three months to get accurate revenue figures. To help you understand the P&L report we are going to break down and actual statement from a small architecture firm. We will also talk a bit about profitability, annual targets, and budgeting.