Whether you’re a business owner or an investor, it’s important to understand the financial statements. It offers a clear and data-driven picture of a company’s overall financial health and how the company is performing. It actually reveals the exact numbers of revenue, expenses, debt, and operational efficiency, which helps in preventing poor financial decisions and fostering growth. Without that, it will become hard to know how well a company is managing its resources, where improvements can be made, and where further resources should be allocated.
Every entrepreneur started their business because they had a plan and a vision to do so, not with the goal of becoming an accountant and reading financial statements. However, when it comes to expanding the business operations, it becomes crucial to know all the parameters, ratios, and numbers mentioned in a P&L statement.
At Errizo, we help entrepreneurs break down the detailed patterns of their P&L statements and also provide simplified explanations with actionable insights to help them make informed decisions for their business growth. Just like that, in this guide, we will simplify what exactly a P&L statement reflects and how entrepreneurs can leverage it to drive strategic decision-making and achieve sustainable financial growth.
What Numbers to Watch For?
Let’s break it down in simple terms, without any technical jargon.
An income statement, or a profit and loss (P&L) statement, is a financial report that summarizes a business’s revenues, costs, and expenses over a specific period of time. It reveals whether a company has earned a profit or incurred a loss.
You want your business to grow and expand – hence every figure and word mentioned in your business P&L statement deserves your attention.
For example – if you’re conscious about whether it’s the right time or not to invest, hire, or expand, then you can easily get the answer by looking at the profit margins.
Knowing what all is covered in a P&L statement is essential to set the foundation for reading and analyzing any P&L statement like a pro.
1. Revenue (Sales)
This is the total income that your company generated by selling the products or services.
2. Cost of Goods Sold (COGS)
It includes the direct costs that are connected with the production of products or services you sell. For example: raw material, manufacturing labor, shipping costs, and so on. If COGS is less than revenue, it means your business is profitable.
3. Gross Profit
It means how much your business earns after reducing the COGS from the revenue.
4. Operating Expenses
It includes the day-to-day expenses that are required to run the daily operations of your business, such as rent, cost of marketing, salaries, utilities, office supplies, etc. Some costs may be fixed, whereas some may fluctuate over time.
5. Non-Operating Income & Expenses
It includes the income and costs that are not related to the business’s core operations, such as investments and interest earned. These figures help explain the fluctuations in overall profitability.
6. Earnings Before Tax (EBT)
It represents how much profit your business has made before paying the applicable taxes.
7. Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA)
It indicates the company’s profitability from its core operations, before including interest, taxes, depreciation, and amortization. It provides a clear view of the cash flow potential. A positive EBITDA means the business is generating enough revenue to cover its operating expenses and has the potential for growth, whereas a negative EBITDA is a big red flag.
8. Net Income (Net Profit or Net Loss)
It’s the final and most important figure that reflects how much profit or loss your business has made during the tenure. It is calculated by subtracting all expenses, including taxes and interest, from the company’s total revenue.
Also Read Our Recent Post:- How Does Errizo Help Businesses Manage Growth Without Financial Stress?
Your Step-by-Step Guide to Analyze Any P&L Statement in Just 5 Mins
You have won half of the battle by understanding all the important key elements of a P&L statement. Now, we will share a quick roadmap with the detailed navigation that will help you to read and analyze any P&L statement as if you were born as an accountant.
Step 1. Read the P&L From Bottom to Top
Start reading with the net income, not the revenue. This will immediately tell you whether the business is making a profit or bleeding cash like a waterfall.
Step 2. Ask One Question Per Section
Don’t just check the numbers; ask some questions, and grab the answers by looking at the numbers.
For example:
- Is my business growing? Just look at the revenue.
- Is this business more scalable? EBITDA is your answer.
- Is the business sustainable? Net income.
This way, you won’t feel any pressure to understand the P&L statement and can easily analyze the financial health of the business.
Step 3. Identify & Terminate the Profit Killers
Profit is the hard-earned money that you deserve to have, so as soon as you start analyzing any P&L statement, scan the expense section and highlight the fastest-growing expense, unwanted expense, largest expenses, and the expense growing faster than revenue.
This way, you will be able to easily identify and terminate any profit killers that may be hindering the financial success of the business.
Step 4. Separate Core Performance Noise
Every business has multiple ups and downs—so don’t feel negative after wandering in the noise. Understand the core performance of your business with the help of EBITDA and use it as a filter. If EBITDA is strong, but the net income is low, it means the issue lies in the operational efficiency or interest payments.
Step 5. Know What Not to Over-Analyze
Not every figure needs to be overanalyzed, and not every fluctuation is a problem. Ignore short-term fluctuations in the market or minor changes in the expenses that don’t significantly impact the overall health of the business.
Conclusion
Analyzing a P&L statement isn’t just about knowing the figures. It’s about knowing how much ROI your efforts are getting. Understanding the key drivers and components in a P&L statement will help you make informed decisions and improve profitability in the long run. In addition to that, the 5 steps mentioned by us can easily help you analyze any P&L statement in just less than 5 minutes. You will be able to quickly identify the areas of concern or build opportunities for growth.
At Errizo, we enable businesses to lead their finances with our advanced consulting services. We provide tailored services and solutions to help businesses maximize their profits and achieve their financial goals. If you need any help, get in touch with our consultants and avail a free blueprint of how your business can scale upwards in the growth chart.
