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A Profit & Loss Statement (P&L) measures the activity of a business over a period of time – usually a month, a quarter, or a year. This financial report may have several different names: profit & loss, P&L, income statement, statement of revenues and expenses, or even the operating statement. The P&L basically tells you revenue, expenses, profit, and loss. Keep in mind that in almost all circumstances, profit is not the same thing as cash flow.
Revenues – expenses = net profit.
P&L statements generally follow this format:
Revenues
– Operating (variable) expenses
= Gross profit (operating) margin
– Overhead (fixed expenses)
= Operating income
+/– Other income or expense (non-operating)
= Pre-tax income
– Income taxes
= Net income (after taxes)
Revenue is the money you receive in payment for your products or services.
Operating, or variable, expenses are the expenses that rise or fall based on your sales volume.
Gross profit margin or operating margin is the amount left when you subtract operating expenses from revenues.
Overhead, or fixed, expenses are costs that don’t vary much month-to-month and don’t rise or fall with the number of sales you make. Examples might include salaries of office staff, rent, or insurance.
Operating income is income after deducting operating and overhead expense.
Other income or expenses (non-operating) generally don’t relate to the operating side of the business, rather to how the management finances the business. Other income might include interest or dividends from company investments, for example. Other expenses might include interest paid on loans.
Pre-tax income is income before federal and state governments take their share.
Income taxes How income tax is shown on the P&L varies based on the type of legal entity. For example, a C corporation almost always shows income tax expense, but S corporations, partnerships, LLCs, and sole proprietorships rarely show income tax expense on the P&L.
Net income (after taxes) is the final amount on most profit-and-loss statements. It represents the net total profit earned by the business during the period, above and beyond all related costs and expenses.
Sample Company, Inc.
Sample Profit & Loss Statement
August 1-31, 2010
Operating Revenue
Product sales$12,000
Service sales$3,000
Total Operating Revenue$15,000
Operating Expenses
Cost of goods sold$7,000
Gross Profit$8,000
Overhead
Rent$1,500
Insurance$250
Office supplies$150
Utilities$100
Total Overhead$2,000
Operating Income$6,000
Other Income (Expenses)
Loan interest($500)
Earnings Before Income Taxes$5,500
Income Taxes$500
Net Earnings$5,000
Categorize expenses
Create a review schedule
Establish goals
The consequences of a smaller company spending too much are far greater than for larger companies. If you own a small business it’s especially important to control expenses. Here are some tips for taking an organized, logical approach to managing your expenses:
Categorize your expenses as short-term, long-term or fixed. What’s the difference between the three?
Short-term items are things like wages for part-time and seasonal workers, because these may change within a six-month period.
Long-term expenses are items such as leases and contracts with vendors, which may last up to a year.
Fixed costs, such as mortgage payments, rarely change.
After categorizing your expenses, rank them in descending order of cost within each group. This process will help you see more clearly where your money is going.
Create a schedule to review the items in each expense category. Look at your short-term expenses more frequently than your long-term costs because you can make changes to these more easily. If you are successful cutting costs in one area, see if you can transfer your strategy to another area of your business.
Establish goals for reducing each expense category by a manageable percentage. If you have employees, assign someone to meet each cost-cutting goal, or consider rewarding employees for finding ways to cut costs.