How to Read a Profit and Loss Statement

Many entrepreneurs and CEOs get a profit and loss statement (P&L), scan it, and promptly file it away. However, it is important to be able to read and understand these reports so you know how much money is coming in, how much is going out, and what it’s being spent on. Here are some basics to help you read your next P&L statement.

profit and loss statement

P&L: The Basics

Profit and loss statements typically cover a set period of time such as a month, a quarter or a year. The sales line, also called the revenue line, is one of the most important records on the report. Because it almost always appears at the beginning of the report, it is referred to as the “top line.” The proverbial “bottom line” of a P&L report is a company’s Net Earnings. That is, of course, the revenue that is left after all costs are taken care of.

Costs are typically listed in an order that goes from the most concrete costs to abstract costs:

  • COGS – Refers to Cost of Goods Sold. These are the costs that are directly associated with producing the goods and services the company sells. This includes raw materials, man hours, etc.
  • DSC – Direct Sales Costs. These are usually listed as an attachment to COGS. This line item includes costs that are related to sales but do not fall under COGs. It will include things like logistics, discounts, commissions, etc.
  • Depreciation – Investments depreciate in line with the lifespan of an asset. A piece of machinery that was worth $1 million in 2006 is worth less ten years later. On this line item, only the cost of the depreciation itself is recorded.
  • OPEX – Operational Expenditures. This category covers wages that are not included in COGS. In some cases, it will also cover unpaid invoices and other bad debts.
  • Financial Costs and Gains: These are nonoperational costs and local laws dictate how these costs are recorded.
  • Extraordinary Costs and Gains: Also nonoperational costs. These may include selling a fully depreciated asset, or costs that had nothing to do with business, such as settling a lawsuit.

You will also find a few items under the profit side of a P&L report:

  • Gross Profit – Calculated by subtracting COGS from revenue.
  • EBIT – Gross profit minus OPEX.
  • EBITDA – Earnings Before Interest, Tax, Depreciation and Amortization. Add back on depreciation and amortization to calculate this line. After all, depreciation does not actually represent an outflow of cash.
  • Net Earnings – Also called net income. This represents the actual “money in your pocket” and is the net total of subtracting interest and tax from EBIT.

Many CEOs and upper managers of small businesses fail to read and understand the nuts and bolts of profit and loss statements. However, understanding how these reports read is critical for building a successful company over the long term.  If your business is growing and you are ready to expand your accounting and finance staff, give the A&F recruiting experts at CSS a call today. We can connect you with exceptional accounting professionals who will keep your money flowing, your reporting accurate, and your business humming.