Understanding your financial reports is the key to understanding what is happening in your business. Let’s dive into the profit & Loss profit report and uncover what it is.
A Profit and Loss Report, also known as an income statement, shows the profitability of your business over a specific period. It can cover any period of time but is most commonly produced monthly, quarterly or annually. A Profit and Loss Report is a useful tool for monitoring business activity.
The Profit and Loss Report also allows you to examine revenue and expenses trends, cash flow, net income and over profitability.
Structure of a Profit and Loss Report
Revenue: This entry represents the net sales during the accounting period. It includes the revenue earned from the primary business and other revenue.
Cost of Goods Sold: It represents the cost of products and services.
Gross Profit: Also known as gross income or gross margin, the gross profit is net revenue excluding costs of sales.
Operating Expenses: Operating expenses are expenses that are related to running the business for a specific period of time. This includes rental expenses, payroll, utilities and any other expenses required to operate the business.
Operating Income: It refers to earnings before taxes, depreciation and interest.
Net Profit: Net profit is the total amount earned after deducting all expenses.
How to Calculate Profit
Use your profit and loss statement to extract important figures to explain your business’s profitability:
Gross profit = Total revenue – Cost of goods sold
This is the difference between total sales and the cost of producing the goods or services you sell. This is an indicator of overall production efficiency and a key figure for setting prices and sales targets.
Gross profit margin = (Gross profit ÷ Total revenue) x 100
This shows what proportion of gross profit you keep from each dollar of revenue generated (e.g. 20% gross profit margin means you keep a gross profit of $0.20 for every $1.00 of revenue generated).
Operating profit = Gross profit – Operating expenses
This shows the profit generated from core operations. It does not include expenses from interest or taxes (often called earnings before interest and tax, or EBIT).
Net profit = Total revenue – (Costs of goods sold + Operating expenses)
This is also known as the ‘bottom line’—net profit is the total amount earned (or lost) after paying all expenses.
A profit and loss report is a useful tool for monitoring business activity. As a business owner, it highlights where your business is succeeding and where is may be struggling.