Understanding Your P & L

Whether manual or computer-based, the accounting system you use is designed to generate two financial statements: the P & L (Profit and Loss, or income statement) and the Balance Sheet.

Prepare your financial statements as frequently as possible, with monthly statements usually being the most useful. If monthly statements are impossible for some reason, quarterly statements will do, but don't fall into the trap that many businesses do by generating your statements only once or twice a year. Remember, these financial statements function primarily as a management tool, and you shouldn't go 365 days without paying attention to the information they provide.

The Profit and Loss statement (P & L) measures the results of operations of a business over a given period of time — typically a month, a quarter, or a year. In effect, the P & L adds all the revenues of the business and subtracts all the operating expenses, thereby providing its user with a figure representing what's left: the profits. (If the total expenses exceed the total revenues, the business would have a loss instead of a profit.)

Figure 1 shows a sample P & L statement to help you understand how to construct one and how to effectively use it in managing your business. You can use a wide variety of formats in presenting a P & L statement. The four-column format in Figure 1 can be used for both the Profit and Loss statement and the Balance Sheet and lets you quickly and easily compare each of the three key figures (Prior Year, Budget, and Current Year). The fourth column measures the percentage increase or decrease (in parentheses) between the current year and prior year.