SMB Accounting
The P&L is the most important report for knowing whether your business makes money. We teach you to read and interpret it in 5 minutes.
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Create a free accountThe P&L (Profit and Loss statement, or Income Statement) is the most important financial document for understanding whether your business makes or loses money. But most small business owners do not know how to read it — and that costs them dearly.
In this guide we explain the P&L in a simple way, with a real step-by-step example. By the end you will be able to read (and produce) your own Income Statement without being an accountant.
The P&L (also called the Income Statement) is a report that shows, for a specific period (a month, a quarter, a year), this:
Unlike the balance sheet (which is a snapshot of a specific moment), the P&L is a movie of what happened during a period. It is the report that answers: "did I make or lose money this month?"
A professional P&L always follows this structure:
Let's go through it piece by piece.
It is everything you invoiced during the period. Careful: invoiced, not collected. The P&L is prepared on an accrual basis (when you issue the invoice), not a cash basis (when you get paid). This is critical and many small businesses confuse it.
These are the expenses directly associated with producing or delivering what you sell. If you sell products, COGS is raw materials, factory cost, shipping. If you sell software, it is hosting, the third-party APIs you use, the licenses included in your service.
It is what is left after subtracting COGS from revenue. Gross margin tells you how much you generate on each sale before paying for your structure. In SaaS it is usually 75-85%. In physical e-commerce, 30-50%. In professional services, 60-80%.
Everything you need to run the company but that does not go directly into producing the service: salaries of non-production staff, office, management software, accounting, marketing, etc.
"Earnings Before Interest, Taxes, Depreciation & Amortization." It is profit before interest, taxes and amortization. It is the metric investors look at most because it shows the pure profitability of the business, without accounting effects.
It is what actually remains at the end, after taxes and interest. The bottom line. If it is positive, your business makes money. If it is negative, you are losing money.
When you open a P&L, look at these 4 things in this order:
If you pay for your own meals with the company card, it inflates your expenses and your P&L stops being useful. Always keep accounts separate.
The P&L uses the accrual basis. If you invoice in January but get paid in March, the sale goes in January. To see liquidity, use cash flow, not the P&L.
If one month you put "advertising" under marketing and the next under sales, your comparative P&L is useless. Define fixed categories from the start.
Monthly at a minimum. If you are in startup mode, ideally weekly (with a partial close of the current month). Founders who review their P&L every week spot problems earlier than those who see it at the end of the quarter.
The P&L is not "the accountant's thing." It is your control panel as a founder. If you do not understand it, you cannot make good decisions.
Doing it by hand in Excel every month is possible but painful. The modern way is to automate it from your real transactions. That is exactly what the P&L Reports module of Hayes Strategic does: you record your transactions once, and the Income Statement is generated with a single click.