What Does P&L Stand For in Business?

In business, P&L stands for Profit and Loss. A P&L statement is a financial report that summarizes a company’s performance over a specific period, such as a month, quarter, or year. Also known as an income statement or earnings statement, its purpose is to show if a business has made a profit or suffered a loss. The statement achieves this by detailing revenues earned and matching them with the expenses incurred to generate that income.

Core Components of a P&L Statement

A Profit and Loss statement is structured to flow from total sales down to the final profit figure. The first line item is Revenue, or Sales, which represents all income a company generated from its primary business activities before deducting costs. This total amount of money brought in from selling goods or services is often called the “top line” of the P&L statement.

From revenue, the Cost of Goods Sold (COGS) is subtracted. COGS includes the direct costs of producing goods or services, such as raw materials and direct labor; for service-based businesses, this is often called the Cost of Sales. Subtracting COGS from revenue results in the Gross Profit, which indicates how efficiently a company manages its production and pricing.

Next, Operating Expenses (OpEx) are deducted from gross profit. These are the costs for the day-to-day functioning of the business not directly tied to production, such as rent, administrative salaries, marketing, and utilities. These expenses are often grouped as Selling, General, and Administrative (SG&A).

Subtracting operating expenses from gross profit yields Operating Income. This figure shows the profit a company generates from its core business operations before accounting for items like interest and taxes. After deducting interest expenses and income taxes, the result is Net Income. As the last line on the statement, net income is known as the “bottom line” and represents the total profit or loss for the period.

How to Analyze a P&L Statement

Analyzing a P&L statement requires reading the document from top to bottom to understand how the company arrived at its net income. This process reveals where money is being made and spent, offering insights into the company’s operational efficiency and financial health.

One technique is Vertical Analysis, which states each line item on the P&L as a percentage of total revenue. For example, calculating COGS as a percentage of sales reveals the profit margin on products. Expressing operating expenses as a percentage of revenue helps show how much of each dollar earned is consumed by overhead.

Another method is Horizontal Analysis, which involves comparing P&L statements from different periods side-by-side. By looking at the same line item, such as revenue, from this quarter versus the same quarter last year, you can identify trends like sales growth, cost increases, or changes in profitability.

The P&L and Other Key Financial Statements

The P&L statement is one of three primary financial documents, along with the balance sheet and the cash flow statement. The P&L statement is unique because it reports on financial performance over a period of time, like a movie capturing a company’s operations for a quarter or a year.

In contrast, the Balance Sheet offers a financial snapshot at a single point in time. It lists a company’s assets, liabilities, and owner’s equity on a specific day, showing what the company owns and what it owes.

The Cash Flow Statement tracks the actual movement of cash. A P&L statement uses accrual accounting, recognizing revenue when earned and expenses when incurred, regardless of when cash changes hands. For instance, a large sale on credit appears as revenue on the P&L but won’t appear on the cash flow statement until the customer pays. The cash flow statement focuses only on the inflows and outflows of cash from operating, investing, and financing activities.