For business owners and operators, profit and loss (P&L) statements are important for assessing financial health and profitability. This financial report lets you see how well you’re doing over a specific time period, while also offering insights into how you can improve.
Profit and loss statements are also sometimes referred to as income statements — and are often required when applying for a small business loan or filing taxes. A monthly P&L can give insight that can help you develop strategies for boosting your profitability. Download a P&L statement example template and keep reading to learn how to use it to analyze your business’s finances.
What is a P&L statement?
A P&L statement measures two things: costs and revenues. You can create a P&L statement yourself or by using specialized software, to see at a glance where your business is thriving and where there might be room to be more efficient.
Why you need a profit and loss statement
Consistently running annual, quarterly, and monthly P&L statements lets you spot trends and business patterns. Tracking data in real-time is especially valuable for restaurants and other industries where profit margins are notoriously slim, since you can see a line-by-line breakdown of where you are making — or draining — money. With the data from a monthly P&L, you can then plan a budget that optimizes food costs and minimizes excess staffing to help trim costs and boost profits.
"Take one day a month — one hour — to just go through it. Understand every little thing; otherwise, it will be death by a thousand cuts."
What a profit and loss example will contain
Some P&L statements are more complex than others, but for small businesses, a P&L will show where your business is making money — and where that money is going. The most common sections of P&L statements are:
Sales breakdown: The sales breakdown shows your profits across several different categories. For example, a restaurant owner can look at revenue for food, wine, beer, liquor, and non-alcoholic beverages. A small business P&L broken down by category will help you get a better understanding of what’s selling well.
Cost of goods sold (COGS): Also known as direct costs, this is the sum of what it costs you to create the goods or products you sell. Using inventory tracking systems can help you easily determine this cost. Like the sales breakdown, the COGS is divided into different categories for easier analysis.
Labor costs: While some P&Ls include labor costs in the COGS section, separating direct labor costs into their own section will help you optimize your daily operations. Labor costs include salaries and wages, benefits, and payroll taxes.
Prime cost: The prime cost calculates the total direct cost of a product sold by combining labor costs and COGS. This figure can help small business owners adjust staffing as needed, especially if the labor costs are higher than they should be in relation to sales.
Other operating costs: Any indirect costs you incur to run your business belong here. It’s not uncommon for this number to change from one month to the next, depending on unexpected repairs, fluctuating utility bills, or one-time promotions. Generally speaking, all of the following should be accounted for as operating costs:
Rent/mortgage, utilities, insurance, property taxes
Promotions and marketing
Repairs and maintenance
Overhead costs (management fees, franchise royalties, etc.)
Depreciation: Knowing the depreciation value for your business assets — whether a custom brick oven, real estate property, or an industrial refrigerator — can help you determine your annual tax write-offs later on.
Net profit or loss: Once you’ve calculated all your costs and revenues, a P&L will generate your net profit or loss, so you’ll know at a glance how financially healthy your business is.
How to read a profit and loss (P&L) example
It’s easy to see whether or not your business is profitable by looking at the total net profit or loss, but to really reap the benefits of such a comprehensive report; it’s important to make that information work for you. Here’s how:
Pay attention to patterns: As you generate these reports over time, patterns will emerge that can help you decide what needs changing. Which weeks or seasons are most profitable for your business, and when do you see those profits dip? What’s contributing to those shifts? Are there menu items that end up costing you more money than they bring in? Taking note of these trends prepares you for the future and helps you make informed decisions about menus, staffing, and suppliers.
Create benchmarks: While no two businesses are the same, knowing how your peers and competitors are doing can guide you when creating benchmarks to optimize your operations. For example, the average labor cost for restaurants is 25-35% of sales, depending on the type of restaurant. Just keep in mind that benchmarks shouldn’t necessarily be rigid, only guidelines.
React appropriately: Use your income statement to develop a plan that boosts your future profit margin. The P&L statement will highlight your strengths and weaknesses, so create a strategy based on that data. Are there certain time periods when you can staff fewer people? Can you add delivery services to boost profits and brand awareness? Is there a lower-cost channel to funnel your marketing budget, like social media or email marketing? Strategically lowering costs based on past trends can help boost your bottom line.
What to think about your profit and loss statement
As you get in the habit of regularly creating a financial statement for your business, these are key considerations and strategies.
Focus on profitability: This is what you’re hoping to learn from a cash flow statement — whether your business is actually making money. If the answer is no, a breakdown of costs and revenues can help you create a plan to boost your operating profit.
Be patient: If you’ve just started creating P&L statements for your business, take it one step at a time and track changes as they happen. While progress might be slight at first, the right course of action can help you drive significant improvements over the long haul.
Small details matter: Food and supply costs, staffing, and overhead are all areas to target cost-cutting for business owners. Focusing on small details in the short term can add up, helping you make changes to improve your net income.
Celebrate wins: If you use the data from a P&L to make improvements, keep track of any increase in your financial performance. How have your operations improved? Seeing the success of a metrics-driven strategy is great motivation and should be cause for celebration.
Are you ready to get started with a P&L statement of your own? Download the free DoorDash P&L template today.