What’s a P&L, and Why Does It Matter?

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If you’re running a business, one of the most important tools in your financial toolkit is the Profit and Loss Statement, or P&L for short. This report summarizes your business’s revenues, costs, and expenses over a specific period of time. Most businesses will only review it during tax time. Unfortunately, most business owners bury their heads in the sand and don’t look at it at all! If this is you, that’s ok – all business owners are guilty of avoiding their finances. If you review it quarterly, or even monthly, you’ll gain a lot of crucial insight into your business. The P&L shows whether your business is making a profit or operating at a loss. 

Understanding your P&L is essential for making informed, strategic decisions. Here is a breakdown of each component and why it matters.

Revenue

Also known as sales, revenue is the total income your business generates from selling goods or services. It is the starting point of the P&L and tells you how much your business brought in during the reporting period.

Cost of Goods Sold (COGS)

These are the direct costs associated with producing the goods or delivering the services your business sells. This includes materials, labor, and production costs. Subtracting COGS from revenue gives you the gross profit.

Gross Profit

Gross profit is calculated by subtracting COGS from revenue. It tells you how much money remains after covering the costs to produce your products or services. This is a key measure of operational efficiency.

Operating Expenses

These are the indirect costs of running your business. They include rent, employee salaries, utilities, marketing, subscriptions, and other day-to-day expenses. These costs are not tied directly to production but are essential to keeping the business running.

Operating Profit

Also called Earnings Before Interest and Taxes (EBIT), operating profit is your gross profit minus your operating expenses. It reflects how much your business earned from core operations before taxes and interest are applied.

Other Income and Expenses

This section includes additional financial activity such as interest earned or paid, tax payments, and gains or losses from investments or asset sales.

Net Profit (The Bottom Line)

Net profit is what remains after subtracting all expenses, interest, and taxes from revenue. It is the final number on the P&L and shows whether your business is truly profitable. This is also what investors and lenders will review when assessing your financial health.

Why Does It Matter?

Knowing how to read your P&L allows you to manage your business with more confidence and intention. It helps you:

• Adjust pricing strategies

• Manage and reduce unnecessary expenses

• Plan realistic budgets

• Prepare for growth opportunities

A clear and accurate P&L can also help you identify if your business is not profitable and why. It gives you the insight needed to correct course and move toward long-term financial health.

Whether you're applying for funding, preparing for tax season, or simply trying to understand your numbers better, your P&L is one of the most powerful tools you have.

Need help making sense of your P&L?

We’re here to walk you through it and help you make informed decisions for your business.