The profit and loss statement (P&L statement) is one of the three main financial tools for the management analysis of an enterprise. It allows investors, owners, and shareholders to assess the project’s marginality at any time. In contrast to the balance sheet, which is a snapshot of the company’s activity as of a specific date, the P&L statement shows financial results. By comparing expenses and income, it shows whether the company made a profit or operated at a loss.
What P&L Statement Is
The P&L statement explains how debit and credit transactions change the balance between key dates. Reading a P&L statement, investors see if the business is efficient: how much money it makes and needs to cover current expenses, how the balance between income and expenditure is achieved. The statement also shows what profit should be expected at the end of the reporting period, what part of it will be received by equity participants, shareholders, investors, etc.
The P&L statement is an integral part of management accounting that allows you to make timely decisions aimed at business development. The frequency of generating profit and loss statements (monthly, quarterly, annually) depends on the accounting policy of the company.
Who Makes P&L Statements
Usually, generating P&L statements does not require any special software. Any accountant or economist can deal with making and maintaining it. The first thing they will have to face is an Excel sheet consisting of two main blocks: Income and Expenses.
There is no clear guideline on what objects of expenditure must be reflected in a statement. This will largely depend on the specific nature of the company’s work, structure, production process, sales market, etc.
It is also worth considering that according to IFRS, debit and credit should be registered in the statement upon operation (i.e. when the goods are shipped, sold, or bought) and not upon the date when the funds were received or spent. It’s more convenient to reflect financial operations in a separate entry to see how much working capital the company has as of the reporting date (see the example).
How to Make a P&L Statement
To understand the principle for filling out a report, let’s look at the sheet below.
Revenues. In economic terms, this part contains all transactions that lead to an increase in economic benefits, such as received funds, asset capacity, reduced obligations.
You can enter data as subtotals, for example, month’s profit (row 5). But in terms of making managerial decisions, it’s much more visual and convenient to describe objects of income in more detail. You can spread them out across types of activity, groups of the produced goods, services provided, counterparties, etc.
Analyzing the demand behavior for a particular type of product allows you to adjust the business strategy in a timely fashion, identify avenues for business development, revitalize unprofitable areas, and much more.
In our example, income is distributed from the bottom up — across counterparties, i.e. customers. But income from regular customers (row 8) and new customers (row 7) is distinguished separately. These two indicators ass up to a gross income for the month (row 5).
If there were refunds during the month, these operations are recorded separately (row 4, columns E, F, I, etc.) and subtracted from the gross income (row 5).
After subtracting commissions and refunds, we can see the total income (row 3). To get the taxable income (row 2), you need to add gross income (row 5) to the total payment system commission (gross income x 0.5) and subtract refunds (row 4).
Expenditures. The P&L statement sees expenses as transactions that result in a decrease in economic benefits, such as losses, amortization, and obligations commencement.
The expenditure part of the report is divided into subgroups of expenditure objects, including wages, depreciation costs, provision of supplies, logistics, office, etc.
This level of detail allows you to see the overall picture of expenditure; divide the items into fixed and variable; highlight some of them to save money and reallocate resources.
In our example, expenses are grouped by functional purpose:
- salary (including taxes and fees) in the context of the organizational structure: founders, heads of departments, managers, marketers, etc.;
- taxes and obligatory payments;
- organization servicing costs:
- office expenses (rent, utility bills, cleaning, and security);
- office supplies (inventory, stationery, household goods);
- accounting software and services; if there is a company’s inner accounting department, the staff costs are reflected in “Salaries”;
- service (hosting, domain, site support and development, etc.);
- telecom services;
- commission fees;
- advertising costs;
- other expenses: incentive bonuses, interest payments for credits, courier service, etc.
This gradation allows you to systematize expenses, calculate fixed and variable costs, and identify their share in the total expenditures of the company.
Fixed costs (row 60) include taxes (row 12), salaries (row 13), office expenses (row 29), office supplies (row 37), accounting (row 38), wage taxes (row 39), server rent (row 42), telecom services (row 45), bank commission (row 49), advertising costs (row 51).
Variable costs (row 61) include the purchase of furniture and appliances (row 35), stationery (row 36), bonus and incentive payments (row 56), minor repairs and other costs (row 59).
To find the organization’s monthly expenses, we summarize the key expenditure items in the sheet: taxes (row 12), salaries (row 13), advertising costs (row 51), other costs (row 55).
How to Read P&L Statement
When all the operational items are recorded in the sheet, it is time to strike a balance, analyze activities, and develop a new business strategy.
- To determine whether the company showed profit or loss, subtract total costs from the total income (row 5 and row 62). That’s how you get the amount of cash inflow or outflow (row 64).
- To determine if a business is attractive for investors, you can use the EBITDA margin, i.e. Earnings Before Interest, Taxes, Depreciation, and Amortization (row 66). Take total income (row 5) and subtract loan payments (row 57), interest payments for credits (row 58), and taxes (row 39).
You can download this template of the P&L statement here.