[et_pb_section fb_built=”1″ _builder_version=”4.16″ da_disable_devices=”off|off|off” global_colors_info=”{}” da_is_popup=”off” da_exit_intent=”off” da_has_close=”on” da_alt_close=”off” da_dark_close=”off” da_not_modal=”on” da_is_singular=”off” da_with_loader=”off” da_has_shadow=”on”][et_pb_row column_structure=”1_3,2_3″ _builder_version=”4.23″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” width=”100%” custom_padding=”||0px||false|false” locked=”off” global_colors_info=”{}”][et_pb_column type=”1_3″ module_class=”table-contents” _builder_version=”4.23″ background_color=”#f3f2f6″ custom_padding=”25px||25px||true|false” sticky_position=”top” sticky_limit_bottom=”section” sticky_position_tablet=”top” sticky_position_phone=”none” sticky_position_last_edited=”on|desktop” border_radii=”on|24px|24px|24px|24px” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text _builder_version=”4.23″ text_font=”||||||||” global_colors_info=”{}” background__hover_enabled=”on|desktop”][\/et_pb_text][\/et_pb_column][et_pb_column type=”2_3″ _builder_version=”4.16″ custom_padding=”|||” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text admin_label=”Intro” _builder_version=”4.27.7″ header_2_font_size=”32px” custom_margin=”||0px|||” custom_padding=”||28px|||” header_2_font_size_tablet=”30px” header_2_font_size_phone=”26px” header_2_font_size_last_edited=”on|tablet” global_colors_info=”{}”]<\/p>\n
The profit and loss statement<\/a> is a financial report that shows whether you\u2019re making or losing money. You need to have one \u2014 and accountants love them \u2014 because they neatly lay out your incomings and outgoings.<\/p>\n The trouble with P&Ls is that they’re just numbers without context, and people tend to skip down to net profit. For your own business, when a problem pops up and you aren\u2019t quite sure how to address it, you need to know what the numbers are telling you before you can troubleshoot.<\/p>\n Let\u2019s look at how to read your profit and loss statement to identify problems and fix them.<\/p>\n Your profit and loss statement is a document with three main components: your gross profit, operating profit, and net profit. Each number tells a story about your business and contains key insights, if you know how to read them.<\/p>\n Revenue is everything your business earned from core activities \u2014 selling goods and services \u2014 during a defined period. Beneath that, you also have cost of goods sold (COGS<\/a>). When totalled, revenue and COGS leave you with gross profit<\/strong>.<\/p>\n The best way to interpret this gross profit is to find your gross profit margin<\/a>, which is the percentage of your revenue leftover after paying COGS. High margins tend to be better, but margins are also industry-specific, so it\u2019s essential to compare like with like. If your margin narrows, the likely culprits include rising COGS, procurement costs, supplier changes, or a failure to raise your prices.<\/p>\n Beyond your gross profit margin, it\u2019s important to compare your profit growth and revenue growth. Here is how the two affect each other:<\/p>\n Your operating expenses<\/a> (OpEx) are the indirect costs of doing business, outside of COGS. Think of it as your overheads like rent, utilities, and wages. Subtracting OpEx from your gross profit leaves you with your operating profit.<\/p>\n Beware of making too many cuts at this layer, since it\u2019s wiser to spend smarter (not less). For instance, look at the growth rate of your expenses vs revenue. This will show whether your revenue is growing in line with your costs.<\/p>\n In your audits, put your operating costs into two baskets: infrastructure and productivity. Infrastructure is necessary for your business to function; without it, your business will struggle to stay open. For example, a cafe needs a physical location to operate. Productivity is slightly more abstract, as its benefit is in the execution of something. For instance, accounting software<\/a> can save you valuable time doing admin, so you can focus on other parts of your business.<\/p>\n Infrastructure and productivity aren\u2019t mutually exclusive. Some costs affect both: rent (infrastructure) for a corner cafe may be high, but the location (productivity) is worth the price given the number of customers it brings.<\/p>\n Net profit is the last layer to interpret. It is your total revenue minus everything that costs you money, including obligations that come with running a business, like interest on debt, taxes, and asset depreciation.<\/p>\n If your net profit isn\u2019t strong, there are no easy fixes. You can\u2019t change your tax rate unless you earn less revenue \u2014 which is counterintuitive. This leaves you with interest, i.e. what you pay on your business debts. If your debts have stacked up, try consolidating loans (limiting the number of loan institutions you use) and refinancing for better interest rates to become more efficient with your debt.<\/p>\n Asset depreciation can reveal a disconnect between your profit and cash flow, as depreciation is a non-cash expense that sits in your gross and operating numbers.<\/p>\n Making sense of your P&L requires comparison to prior business history, budget vs actuals, and your own industry competitors. It\u2019s not just an annual report to discuss with an accountant: you need to view it month by month to stay on top of any problems.Understanding Profit & Loss: Gross > Operating > Net<\/h2>\n
Gross profit: Revenue vs COGS<\/h3>\n
\n
Operations: The architecture of your business<\/h3>\n
Net profit: What you owe<\/h3>\n
Interpreting your profit and loss statement<\/h2>\n
These are the key concepts that help you interpret your profit and loss statement:<\/p>\n\n