How to make a P & L

Ty Crandall
CEO, Credit Suite
(877) 600-2487
info@creditsuite.com
www.creditsuite.com/ein

What is a P&L?
A P&L (Profit and Loss statement) is, according to Investopedia:
“… [A] financial statement that summarizes the revenues, costs
and expenses incurred during a specific period of time, usually a
fiscal quarter or year.These records provide information about a
company's ability – or lack thereof – to generate profit by
increasing revenue, reducing costs, or both.The P&L statement is
also referred to as 'statement of profit and loss', 'income
statement,' 'statement of operations,' 'statement of financial
results,' and 'income and expense statement.'”
See: https://www.investopedia.com/terms/p/plstatement.asp

• The P&L (AKA the income statement), is one
of three quarterly and annual statements a
company makes as to its financial health.
The other two are:
– The cash flow statement
– The balance sheet
• Numerous blank P&L forms are online to help
• Here’s one:
https://view.officeapps.live.com/op/view.aspx
?src=https://businesscreditblogger.com/wp-
content/uploads/2015/02/Profit-and-Loss-
Statement-Worksheet.xlswww.creditsuite.com/ein
What is a P&L?

What does a P&L show?
• The idea is to show changes in
accounts
• This is over a specific time frame
• In that way, it’s similar to your
cash flow statement
• Contrast this with the balance
sheet, which is more of a
snapshot

Why Do You Want To Make A P&L?
• Apart from the obvious – someone asked for one
• That someone can be a lender (lenders will just about
always want a P&L)
• It’s also to give you a handle on the money your
business has
• You know how much capital is coming in …
• … and going out

• Start with Net Revenue (the “top line”)
• This is the money coming in from sales
• Subtract the Cost of Goods Sold
• COGS is the hard costs associated with producing
your product/service
• Those can be materials, equipment, etc.
General Principles

General Principles

• Your Gross Margin is what is left
• Before operating expenses
• Subtract your Fixed Expenses
• These are fixed regular expenses like insurance
and rent
General Principles

• Subtract yourVariable
Expenses
• These are changing expenses
such as travel and marketing
• This is your Earnings Before
Taxes (EBT)
• This is what you have before
taxes are taken out
General Principles

• Subtract your taxes
• These are expenses you have got to pay
• The amount which is left over is your Net Income
(the “bottom line”)
• This will show if your company is profitable, losing
money, or breaking even
General Principles

Principles
• It’s important to compare P&L statements over time
• Profits can rise and fall
• Or variable expenses will vary
• If profits are going up, but so are costs, then the
bottom line might remain more or less the same
• But you won’t know that without the detail inherent
in a P&L

What else can you use a P&L for?
• One thing you can do is
calculate Gross Profit Margin
• This is a company’s total sales
revenue minus COGS
• Divided by total sales revenue
• Expressed as a percentage

Gross Profit Margin
• The gross margin number represents the portion of each dollar of revenue that a
company keeps as gross profit
• If a company's gross margin for the most recent quarter is 45%, that means it
retains $0.45 from each dollar of revenue generated
• The company spends the rest asCOGS
• Because COGS have already been taken into account, remaining funds can go to
paying off debts, general and administrative expenses, interest expenses, and any
distributions to shareholders
• Figure gross profit margin with this equation:
(revenue – COGS)/revenue

Operating Profit Margin
• A P&L can also be used to calculate a
business’s Operating Profit Margin
• Operating profit margin is a margin
ratio
• It is used to measure a company's
pricing strategy and operational
efficiency
• It is a measurement of what proportion
of whatever of a company's revenue is
left over after paying for variable costs
of production like wages, raw
materials, and the like

• Operating Profit Margin is calculated by dividing a company’s operating
income (AKA its operating profit) within a given period by its net sales
during the same period
• Operating income refers to the profit which a company keeps after
removing operating expenses (like COGS and wages) and depreciation
• Net sales means the total value of sales minus the value of returned
goods, any allowances for damaged and missing goods, and discount
sales
• The equation is: operating income/net sales
Operating Profit Margin

Net Profit Margin
• Profit margin is a portion of a category of
profitability ratios calculated as net income divided
by revenue, or net profits divided by sales
• Net income or net profit may be determined by
subtracting all of a company’s expenses, such as
operating costs, material costs (like raw materials)
and tax costs from total revenue
• Profit margins are shown as a percentage and they
effectively measure how much from each dollar of
sales a company keeps in earnings
• A 20% profit margin, therefore, means a company
has a net income of $0.20 per dollar of total
revenue earned

• Net profit margin is the ratio of net profits to revenues for a company or for
a business segment
• It is often expressed as a percentage
• Net profit margins show how much of each dollar collected by a company
as revenue translates into profit
• Calculate net profit margin by figuring: net margin = net profit/revenue
Net Profit Margin

Operating Ratio
• Operating ratio shows the
efficiency of a company's
management; it does this by
comparing operating expense
to net sales
• The lower the ratio, then the
greater the organization's ability
to generate profit if revenues go
down
• When using this ratio, investors
should note that it doesn't take
debt repayment or expansion
into account

• Operating ratio measures operational efficiency
• It is often used, with return on assets and return on
equity, as a measurement of a company's efficient use
of capital and managerial resources
• Tracking the operating ratio over time allows for the
identification of trends in operational efficiency
• Trend analysis can help to identify issues and allow for
timely course corrections
Operating Ratio

• A rising operating ratio means an inefficient
operating environment may need to
implement cost controls to improve its
margin
• A falling operating ratio means an efficient
operating environment has operating
expenses which are increasingly a smaller
percentage of sales
• The equation is: operating expense/net
sales
Operating Ratio

Trends
• Analysts love trends for good reason
• Reviewing comparable time periods (years or quarters, usually),
you can home in on what is making your business profitable –
or causing a loss
• Seeing a trend can provide you with the opportunity to correct
things before they worsen
• Or you can do more of what’s helping your business succeed

The Power of Knowing Your Numbers
• The power of knowing your
numbers is vital to running a
profitable business
• You can make any necessary
adjustments to show a profit
• Numbers do not lie!
• They tell everything about the
health of a business

• Knowing your numbers means you have a huge
advantage over those who do not
• Your profit and loss statement tells a story of your
business
• Understanding the story behind your numbers can
be an extremely important factor for achieving
success
The Power of Knowing Your Numbers

Recap – How to make a P&L
• Know your numbers
• Put together revenue, fixed
and variable costs
• Take taxes and COGS into
consideration
• Several P&L forms are online
to help
• We can help

Contact Us for More Information
877-600-2487
info@creditsuite.com
How to make a P&L

How to make a P & L

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to How to make a P & L

Similar to How to make a P & L (20)

More from Ty Crandall, Business Credit Expert

More from Ty Crandall, Business Credit Expert (20)

Recently uploaded

Recently uploaded (16)

How to make a P & L