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Profit and Loss (P&L) Statements Explained: A Guide for Small Business Owners

Understanding your small business's financial health is critical for making informed decisions. One of the essential financial statements that every business owner should understand is the Profit and Loss (P&L) statement, also known as an income statement. This guide will explain what a P&L statement is, what it includes, and why it's vital for your business's success.

What is a Profit and Loss (P&L) Statement?

A P&L statement is a financial report that summarizes the revenues, costs, and expenses a company incurs over a specific period, usually a month, quarter, or year. It essentially provides a snapshot of your business's profitability during that time.

Components of a P&L Statement

A typical P&L statement consists of several key components:

  1. Revenues or Sales: This section lists the total money earned before any expenses are subtracted. It includes both product sales and service revenues.

  2. Cost of Goods Sold (COGS): This includes all costs directly tied to the production of goods or services sold, like raw materials, labor, and manufacturing costs.

  3. Gross Profit: Gross profit is calculated by subtracting COGS from revenues. It represents the profit made before considering operating expenses.

  4. Operating Expenses: These are the regular, ongoing expenses related to running the business, such as rent, utilities, marketing, salaries, and more.

  5. Net Income Before Taxes: This figure is the gross profit minus the operating expenses. It shows the profit before taxes and other non-operating expenses are considered.

  6. Taxes: Includes the total amount of taxes owed for the period.

  7. Net Income: This is the final profit figure after all expenses, including taxes, have been subtracted from the revenues. It represents the bottom line for the period.

Why Is a P&L Statement Important?

The P&L statement is an essential tool for business owners, investors, and lenders. Here's why:

  • Understanding Profitability: It helps you understand whether your business is making a profit or a loss during a specific period.

  • Identifying Trends: By comparing P&L statements over time, you can identify trends, understand seasonal fluctuations, and make informed decisions.

  • Attracting Investors and Lenders: Investors and banks often request the P&L statement to assess the business's financial health before investing or lending money.

  • Tax Compliance: It's an essential document for calculating the income taxes your business owes.


The Profit and Loss statement is a fundamental part of understanding your business's financial picture. By regularly reviewing and understanding this statement, small business owners can gauge their company's profitability, make informed decisions, and set their business on a path to success.

Resource: To help you get started with creating your P&L statement, download our P&L Statement Template here.

posted August 16, 2023
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