How to Read a Profit & Loss Statement

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A profit and loss statement is divided into sections that spell out the revenue coming into a business and the expenses going out. Find out how sales and raw materials fit into a profit and loss statement with help from the co-founder of a business advisory company in this free video on reading profit-and-loss statements.

Part of the Video Series: Starting a Business
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Video Transcript

Reading a profit and loss statement is not near as complicated as a lot of people like to think. It's divided into various sections that basically spell out the revenue coming in and the expenses going out and in simplest terms. The first section is sales which will be your gross sales number from everything that's sold. Sometimes it's broken down more than that, sometimes it's just total sales. The next figure or the next section is cost of goods sold and that's basically all of the costs that go into making the item to sell. For instance you'll have raw material, you'll have inventory that you purchase freight in, anything that has to do with the actual product that's being sold would be cost of goods sold. You take your gross profit and then you drop down and the next line would be your expenditures or sometimes operating expenses. This would be things like rent, utilities, office supplies, salaries that sort of thing. Those are all itemized out according to the category and that's typically the longest category that most businesses will have if you look at the number of items your operating expenses typically consume the majority of the profit and loss or P and L statement. If you take your operating expense number, subtract that from your gross profit number, you come up with your net operating profit. If you subtract your operating expenses from your gross profit you come up with your operating profit. Then there is a category for other expenses or other income. This is for things that aren't involved in the actual running of the business. It's a lot of times it would be a one time expense or a one time revenue that comes from selling a piece of equipment or buying something that is not really needed for the business so there is a number of reasons but it's, suffice it to say it's for things that aren't really related to the business. You subtract that from your operating profit, you get down to net profit before taxes. Most people like to look at net profit before taxes because it's a pretty good way to compare one business against another because everybody's tax rates tend to be different but on a P and L you'll have your net income before taxes then you'll have your taxes and then you'll have your net income and in essence most all profit and loss statements should be laid out in that fashion.


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