How to Read Profit & Loss

Make sure you understand all categories on your profit and loss statement.

If you are in business, it is important to understand your profit and loss or income statement. Once you evaluate this statement, you will be able to determine if your company or business is making any money. A business that is not profitable will not remain in business for long. To increase your profits, you must either increase sales or reduce expenses or perform a combination of both. If you want to read a profit and loss statement, you must understand every component of the statement.

Instructions

1. Review your profit and loss statement. You must first understand the first category, which is gross sales. This is a total off all sales revenue generated from the sale of the company's products and services. You can find this total by adding up all of your sales invoices. No other category is factored into gross sales.

2. Factor in any discounts or returns. If there are discounts or returns, they must be subtracted from your gross sales to receive your net sales figure. These items directly impact your sales and help you to arrive at a true sales figure.

3. Take a look at the cost of goods sold section. Listed under gross sales are the costs of goods sold, which consists of all the costs incurred by your business during the manufacture of the products that were sold. Some of the costs incurred could be labor and materials used during the production or manufacturing process. Freight charges and inventory are usually part of the cost of goods sold section. Get a total for your cost of goods sold.

4. Calculate your gross profit. You can determine your gross profit by subtracting your costs of goods sold from your net sales.

5. Determine if your business has a profit or loss. All other expenses incurred should now be subtracted from your gross profit (excluding cost of goods sold). Other expenses could include advertising, rent, utilities, salaries, supplies, telephone, and travel expenses. The difference will be your profit or loss. If your gross profit is greater than your expenses, you have made a profit. When your expenses exceed your gross profit, your business has suffered a loss.

Tips & Warnings

• Profit and loss statement are usually formulated during a fiscal quarter or year, according to the website Investopedia.

References

• Small Business Notes: Income Statement
• Champ Net: Profit and Loss Statement
• Investopedia: Gross Sales
• Investopedia: Cost of Goods Sold
• Investopedia: Profit and Loss Statement