The profit and loss (P&L) statement, also referred to as the income statement, is one of three financial statements companies regularly produce. They are carefully reviewed by market analysts, investors, and creditors to evaluate a company's financial condition and prospects for future growth.
What Is in a P&L Statement
The top line of the P&L statement is revenue, or the total amount of income from the sale of goods or services associated with the company's primary operations. Deducting expenses for the running of the business, such as rent, cost of goods, freight, and payroll results in the net operating income. A greatly reduced operating income relative to revenue indicates that a company can keep the lights on, but little else.
To arrive at the bottom line, or net profit, the P&L also takes into account outstanding debts, interest payments, additional income from secondary operations or investments, and one-time deductions for extraordinary events, such as lawsuits. The P&L statement includes subtotals that reflect important information, such as the total amount of long- or short-term debt, the cost of raw materials used to create goods for sale, overhead costs, and taxes.
Each entry gives specific insight into the cash flow of the company and paints a comprehensive picture of where money is coming from and how it is used. The P&L statement is unique in its ability to provide a comprehensive context for assessing financial fitness.
Example of a P&L Statement
Free templates for producing a statement are available on financial websites or included with software packages, such as Quickbooks or Microsoft Office. A P&L statement is based on accrual accounting, which recognizes revenues and expenses when they are incurred, not when money actually changes hands.
The P&L statement is usually a very straightforward presentation of a company's revenues, costs, and net profit for the time period covered by the statement. Companies publish P&L statements annually, while some also publish quarterly statements. P&L statements tend to follow a standard format:
Total Revenue $1,000,000
Less Cost of Goods Sold $378,700
Gross Profit $621,300 (62.13% Gross Profit Margin)
Accounting/Legal Fees $15,500
Utility Bills $4,200
Interest/Finance Fees $16,800
Rent for Offices $78,700
Other Expenses $8,200
Total Expenses $401,500
Net Profit $219,800 (21.98% Net Profit Margin)
Why Are P&L Statements Published?
P&L statements are published for a variety of reasons. The inner financial workings of a company are of great interest to numerous people, including accountants, economists, and investors. Because certain companies are so large, even the business owners themselves may not have a comprehensive understanding of all the company's financial movements without consulting the P&L. For all of these professionals, assessing a company's financial strength means taking a detailed look at total revenue, the amount of debt or leverage, additional investments, secondary operations, and tax burden.
These statements help businesses establish current performance relative to projections and create forecasts for the future. They also compare performance to other companies in the same industry and identify unnecessary expenditures or areas for improvement.
How Investors Consider P&L Statements
Investors and lenders use this information in calculations to determine a company's risk level. To apply for loans, companies must provide evidence of their financial standing and ability to make consistent payments. If the P&L statement reflects that a company does not create enough revenue to adequately cover existing loan payments, banks are less likely to loan additional funds. Sometimes, a downturn in income could signal loan default. Investors may think twice about a company that is highly-leveraged, sometimes called high-geared, because the amount of equity required to cover loan repayments means less is left over to pay shareholder dividends.
The Bottom Line
A P&L statement shows investors and other interested parties the amount of a company's profit and losses. Revenue and expenses are shown when they are incurred, not when the money actually moves, and the statement can be presented in a detailed multi-step or concise single-step format.