Breaking Down the P&L

Accounting is a world full of jargon and special language. COGS, cash vs accrual, equity.

Words not generally spoken by normal folks.

My goal is to make bookkeeping as simple and straightforward for you as possible. 

So today we’re breaking down the P&L into layman's terms.

Let’s go!

Before we start breaking down the P&L let's talk about what it actually is.

The profit and loss statement, also known as the income statement, is one of the most aptly named financial statements.

It shows you your income, or your profit or loss. Simple enough.

This is a statement that covers a specific time period, usually a month, a quarter or year to date.

Year to date (YTD) means everything since the beginning of your business year.

The time period covered will be stated at the top of your P&L.

The first category on your P&L is income, also referred to as revenue.

Depending on how specific you are with your income categorization you could have all your income grouped together as one line item or it could be several lines.

You could display it by service you provided, region, or any other differentiator you can think of or your software will allow. 

Income is an important number, but remember that this is only what you bring into the business, it’s not what you take home to feed your family.

It costs money to earn that income. Which leads us to…

The next stop in breaking down the P&L is to look at the expense category.

This section houses all the expenses incurred during the specified time period covered by the P&L.

These are listed by category, sometimes alphabetically, sometimes grouped by similar expense types.

These categories are usually more general than how you actually categorized your expenses.

For example, you may categorize hotels and flights separately, but they’ll likely show up grouped on your P&L as travel.

These expenses are totaled in a “Total Expenses” line. Your goal should be to keep this number as low as possible while still supporting your business.

So yes, invest in your business because that’s important, but try to stay lean and efficient in the process. Otherwise, you’ll have no….

This is by far the most important number on your P&L.

This is usually referred to as Net income (loss) or net profit.

Net income is your revenue minus your expenses. It’s this number right here that determines if you stay in business if you can take home money to feed your family.

Net income trumps revenue any day.

While yes, you have to have revenue before you can have net income, net income is still more important. 

What good is it to bring in $1,000,000 in revenue if it cost you $999,999 to earn it.

You’ve only made $1.

One stinking dollar.

Focus on net income, focus on increasing your revenue and not increasing your expenses.

There you have it, a break down of the P&L.

Revenue minus expense equals net income or loss. Pretty basic but so important. 

Make sure you’re reviewing your income statement regularly so you can monitor the overall health of your business.

Take control of the finances of your dream. Your dream is too important not to.