What is a profit and loss statement?

Also known as an income statement, a profit and loss statement shows how revenue, costs, and expenses flow down to net income or net profit. This article aims to help you better understand your profit and loss statement as well as a few calculations we can derive from it.  Having a deep understanding of your financials can lead to better decision-making and improve profitability.

Suppose you sold a roller shade project for $4,000. Let's take a look at how that might flow through the profit and loss statement.

A Revenue - this is the amount the project was sold for (excluding any sales tax).

B Cost of Good Sold (COGS) - this is what you paid for the product and the cost of the labor to install.  COGS usually contains variable costs only.  For example, if you had not sold the project,  your cost of goods sold would have been $0.

C Gross Profit - this is revenue less associated costs of goods sold.   Gross profit is also known as gross margin. 

D Gross Profit Margin - this is the gross profit divided by the revenue. It shows how much you made prior to operating expenses.

E Operating expenses - these expenses can be either variable (i.e. salespersons commissions) or fixed (i.e. rent). Operating expenses are more difficult to tie directly to the cost of the project and so they are separated out below gross profit.

F Net profit  - this is how much profit is left after operating expenses. 

G Net margin %  - this is percentage revenue that turned into net profit.  It is calculated as net profit divided by revenue.