For business owners and operators, profit and loss (P&L) statements provide critical information for assessing financial health and profitability. This indispensable tool allows you to see how well you’re doing over a specific time period, while also offering insights into how you can improve operations.
Since P&L statements reflect profitability, they are sometimes referred to as income statements—which are often required when applying for a small business loan or filing taxes. The reports also offer data-driven insights that can help you develop long-term strategies for boosting profitability and better understanding your business’s success on a regular basis. Keep reading to learn more about how to master tracking your business’s finances, and download a profit and loss statement example template.
What is a profit & loss (P&L) statement?
A P&L statement (or simply P&L) measures two things: costs and revenues. By generating a report manually or using specialized software, business owners can see at a glance where their business is thriving and where there’s room to be more efficient over a specific time period. While popular accounting software like Quickbooks or Freshbooks can create P&L statements for you, manual spreadsheets and good bookkeeping can provide the same insights.
Why do you need a profit & loss (P&L) statement?
Consistently running P&Ls—for example, once a month or quarter—enables you to see trends as they happen and gain a better understanding of business patterns. Tracking data in real-time is especially valuable for industries where profit margins are notoriously slim, like restaurants, as you can see a line-by-line breakdown of where you are making—or draining—money.
Understanding your profit & loss (P&L) statement
Some P&Ls are more complex than others, but all show where your business is making money—and where that money is going. The most common sections of P&L statements are:
- Sales breakdown: The sales breakdown shows your profits across several different categories. For example, a restaurant owner may divide revenue by food, wine, beer, liquor, non-alcoholic beverages, or other. This section is easily adaptable to different businesses, too. A good rule of thumb is to take each category of goods or services sold and give them each a different line, from merchandise to grocery, so you have a better understanding of what’s selling well.
- Cost of goods sold (COGS): Sometimes referred to as direct costs, the cost of goods sold (COGS) shows any direct expenses you incur to create the goods or products sold. This includes all of the ingredients of your celebrated truffle risotto, or the amount you paid the vendor for the local hot sauce you sell. Using inventory tracking systems can help you easily determine this cost, as can following consistent recipes and knowing the cost of each dish or item you sell. Like the sales breakdown, the COGS is divided into different categories for better analysis.
- Labor costs: While some P&Ls include labor costs in the COGS section, separating direct labor costs into their own section will help you calculate the prime cost—thus optimizing your staffing and daily operations. Labor costs include salaries and wages, benefits, and payroll taxes.
- Prime cost: The prime cost calculates the total direct cost of a product sold by combining the labor costs and COGS. This figure can help small business owners adjust staffing as needed, especially if the labor costs are higher than they should be based on sales.
- Other operating costs: Any indirect costs you incur to run your business belong here. It’s not uncommon for this number to change from one month to the next, depending on unexpected repairs, fluctuating utility bills, or one-time promotions. Generally speaking, all of the following should be accounted for under operating costs:
- Rent/mortgage, utilities, insurance, property taxes
- Packaging costs
- Promotions and marketing
- Repairs and maintenance
- Overhead costs (management fees, franchise royalties, etc.)
- Depreciation: Knowing the depreciation value for your business assets—whether a custom brick oven, real estate property, or an industrial refrigerator—can help you determine your annual tax write offs later on.
- Net profit or loss: Once you’ve calculated all of your costs and revenues, a P&L will generate your net profit or loss—showing at a glance the financial health of your business.
How to read a profit & loss (P&L) statement
The hard part is over—you’ve entered all of the above information into the P&L. It’s easy to see whether or not your business is profitable by looking at the total net profit or loss, but to reap the benefits of such a comprehensive report, it’s important to transform insight into action. Here’s how:
- Pay attention to patterns: As you generate these reports over time, patterns will emerge that can inform how you operate moving forward. Which weeks or seasons are most profitable for your business, and when do you see those profits dip? What’s contributing to those shifts? Are there menu items that end up costing you more than you make? Taking note of these trends prepares you for the future, so you can adjust operations to match expectations.
- Create benchmarks: While no two businesses are the same, knowing how others fare can help you optimize operations. Are your labor costs on par with those of your industry peers? For example, the average labor cost for restaurants is 25-35% of sales, depending on the type of restaurant. By giving a sense of how others are operating, these figures can help in your own budget development. You may find that the P&L for your restaurant or business looks very different — so make sure to use benchmarks as guidelines, not the law.
- React appropriately: Use your P&L to develop a plan that boosts your future profits. The P&L will show your strengths and weaknesses, so create a strategy based off of that data. Are there certain time periods when you can staff fewer people? Can you add delivery services to boost profits and brand awareness? Is there a lower-cost channel to funnel your marketing budget, like email marketing? Strategically lowering costs based on past trends can help boost your bottom line.
Questions to ask when reviewing your P&L
As you get in the habit of regularly creating a P&L for your business, these simple questions can make a big impact over time:
- Is the business profitable? This is, after all, what you’re hoping to learn from a P&L sheet—whether or not your business is actually making money at the end of the day. If the answer to this question is no, the breakdown of costs/revenues can help you draft a plan to get back on track.
- How does this year/quarter/month compare to last? If you’ve just started creating P&Ls for your business, take it one step at a time and track changes as they happen. While progress might be slight at first, the right course of action can help you drive significant improvements over time.
- Where can we improve? Food and supply costs, staffing, and overhead are all areas to target when developing a more profitable business strategy. Focusing on small details in the short term can help you make impactful changes with lasting payoffs.
- How do our accomplishments compare to last year’s? If you’ve used the data from a P&L to make improvements, make sure those changes are reflected in your bottom line. How have your operations improved? What are you doing well? Seeing the success of a metrics-driven strategy can be cause for celebration, and will motivate you to keep moving forward.
Ready to analyze your business’s financial health with a P&L statement? Download the free DoorDash P&L template, and create your own profit and loss statement example to get started.