The Profit and Loss Statement

Happy Friday!

Friday’s always a good time to read about accounting and reporting, isn’t it?

This week, I will dig into the profit and loss statement. Last week, I covered the three basic financial statements, so that’s a good place to start if you need to catch up.

As usual, I’ll keep it simple and jargon-free, so grab your afternoon coffee ?, sit back, and relax with a little reading about accounting ??.

If financial reports held a popularity contest, the profit and loss statement would win. Everyone loves it. ??

However, I think it’s overrated and should be the last financial statement you review, but who am I to judge a popularity contest?

Let’s break it down to see why it’s so popular with business owners.

The profit and loss statement has five major sections:

1. Revenues
2. Cost of Sales
3. Gross profit
4. Operating Expenses
5. Net Income/Loss (hopefully, there’s not a loss!)

The basic formula, using these sections:

Revenues - Cost of Sales = Gross Profit; and         

Gross Profit - Operating Expenses = Net Income or Net Loss.         

Everyone loves the revenue number ??. When people talk about their seven-figure business, they usually talk about revenues.

So you might have guessed that the revenue section of the profit and loss presents the revenue you’ve made for the period.

Before falling in love with revenue, remember that it’s a vanity metric ?? – more on that later (much later).

The cost of sales presents the costs incurred to generate revenue.

No one likes it, so everyone tries not to invite it to the party. “You didn’t get the invitation? I’m sure I mailed.”

Gross profit is the revenue left over after the cost of sales has been subtracted.

It’s kind of like the leftover food from the party you hosted. You want some of the leftovers for lunch for the rest of the week.

Whatever cost of sales doesn’t eat up of revenues, operating expenses will. These expenses are not directly related to revenue generation, but they are expenses that you need to run your business.

?? Think: rent, travel costs, accounting, legal, etc.

After you subtract all the operating expenses, you should have net income. Hopefully, it’s not a net loss, which means you’ve had more expenses (operating and cost of sales) than you had in revenue. ??.

You may be thinking, “I need more detail than this!”

Maybe. Most profit and loss statements are more detailed in that they break out rent, payroll, and other expenses under operating expenses.

We’ll eventually get to the details, but for now, remember this rule:

?? Detail is earned.

There’s value in aggregating data, and more detail doesn’t always mean more value or insight.

That’s it for today. I hope you learned a little something about the profit and loss statement.