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What is “Loss and Profit” (P&L) ?
The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs and expenses incurred during a specified period, usually a fiscal quarter or year. The P&L statement is synonymous with the income statement. These records provide information about a company’s ability or inability to generate profit by increasing revenue, reducing costs or both. Some refer to the P&L statement as a statement of profit and loss, income statement, statement of operations, statement of financial results or income, earnings statement or expense statement.
It is important to set aside time each month to analyze your financial statements, to enable you to consistently and efficiently control and improve your business.
Usually produced monthly, this is a summary of income and expenses for your business. The Profit and Loss (P&L) will inform you whether your business made or lost money for the month under review.
A P&L usually has five main components:
- Revenue (sales/turnover)
- Cost of goods sold (COGS)
- Gross profit (revenue minus COGS)
- Net profit (gross profit minus expenses)
Formula: Sales – COGS = gross profit – expenses = net profit
The net profit will show whether your business has earned or lost money.
When reviewing your P&L it is useful to analyse four key benchmarks or performance indicators (KPIs).
|What percentage of the sales price covers the cost of providing or producing the product or service?
|COGS as a percentage of sales/revenue
|COGS ÷ revenue x 100
|Is my business running profitably?
|Gross profit margin
Net profit margin
|Gross profit ÷ revenue x 100
Net profit ÷ revenue x 100
|What percentage of the sale price covers the fixed costs of my business?
|Expenses as a percentage of sales/revenue
|Expenses ÷ revenue x 100
Gross profit is an indicator of efficiency. The higher the gross profit margin the better, as your business keeps more from each dollar of sales. If your gross profit margin decreases over time you will need to determine the reason and take action to address the decline.
The net profit margin is an indicator of how much profit you make (before tax) from every dollar you spend. A fall in net profit margin generally means you are paying more in expenses, which needs to be monitored. More profitable businesses generally spend less of their income on expenses.