How to Understand a Profit & Loss Statement
A profit and loss statement shows a business how much it is profiting. It subtracts all its expenditures from all its income to generate a figure that shows the pure profit of the business over a period of a year, quarter or month. Understanding the profit and loss statement is necessary, so a business manager can determine how to increase profits or diminish expenses.
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Instructions
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Look at how much the business budgeted for expenses and sales for the period included in the statement and compare that number with how much the business actually spent on expenses and earned in sales for that period, if the profit and loss statement includes this information. This will show you how well the business was able to stick to its plan during the course of the time period in question.
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Inspect the final profit number. This will tell you whether the business turned a profit for the time period. It is quite possible that the business operated at a loss for the period specified, if it spent more than it brought in during this time.
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Understand where the business spends its money. The profit and loss statement will tell you how it spent its money during the time period in operating and other expenses. This can be beneficial to determine how the business may be able to cut some costs.
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Note how the business performance in the period given compares with the previous year. Many accountants will include a column for how the business performed last year at this time in a monthly profit and loss statement. This will let you know how well the business is on track to continue its success.
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Read the period of time illustrated on the profit and loss statement. Profit and loss statements are typically prepared monthly, quarterly or annually. The period of the specific profit and loss statement you're reading should be indicated at the top of the form.
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