A profit and loss statement is a financial statement that shows the income and expenses of a business in a given period. This document helps business owners understand whether their business is making a profit or making a loss. It gives a clear picture of financial performance. Companies use this information to make decisions on growth, cost cutting or investments. The income statement is an essential part of the financial statements, along with the balance sheet and cash flow statement.
The set-up of an income statement usually starts with revenue. These are the revenues generated by the company in a given period. Then all costs are deducted, such as purchasing costs, personnel costs, and operating costs. The result is gross profit. It then takes into account additional costs, such as interest expenses and depreciation, to calculate the net profit or loss. It gives you insight into how effectively your company manages costs relative to sales.
Why is the Profit and Loss Account Important?
The profit and loss account not only provides an overview of your financial situation, but also helps with strategic planning. By looking at these figures regularly, you can see where your business is making money and where you are losing it. This helps you make timely adjustments. For instance, you can decide to scrap unprofitable products or invest in successful parts of your business. Banks and investors value a clear profit and loss statement. It gives them confidence in the financial health of your company. In short, a profit and loss account makes your business financially transparent.
It is also important to know that a properly prepared profit and loss account will help you meet tax obligations. As an entrepreneur, you are obliged to keep proper accounts. This document is an essential tool in this regard. Don’t have enough financial knowledge? Then consider hiring an accountant to support you. This way, you will avoid mistakes and keep control of your finances.
Would you like more information on a practical example of a profit and loss statement? This will help you better understand the document and apply it to your business yourself.
Profit and loss account Example
For the period: 1 January 2024 – 31 December 2024
| Description | Amount (€) |
|---|---|
| Turnover | 500.000 |
| Cost of goods sold | 200.000 |
| Gross profit | 300.000 |
| Operating costs | |
| – Salaries and wages | 100.000 |
| – Rent | 30.000 |
| – Marketing costs | 20.000 |
| – Insurance | 10.000 |
| – Maintenance costs | 5.000 |
| – Other operating expenses | 15.000 |
| Total operating expenses | 180.000 |
| Operating profit | 120.000 |
| Other costs | |
| – Interest on loans | 5.000 |
| – Depreciations | 10.000 |
| Total other expenses | 15.000 |
| Profit before tax | 105.000 |
| Taxes (30%) | 31.500 |
| Net profit | 73.500 |
Terms
Here is a brief description of the key terms used in the income statement:
Turnover: This is the total amount a company earns by selling products or services in a given period, before deducting costs.
Cost of goods sold: These are the direct costs associated with producing or purchasing the products you sell, such as material and production costs. This is also called the purchase value of sales.
Gross profit: This is the difference between revenue and cost of goods sold. It indicates how much profit remains after deducting direct costs, but before deducting operating costs.
Operating expenses: These are the expenses needed to run a business, such as salaries, rent, marketing, insurance, and maintenance. They are needed to support day-to-day operations.
Operating profit: This is the profit remaining after deducting all operating costs from gross profit. It indicates how profitable the company is in relation to its core business.
Other costs: These are additional costs not directly related to day-to-day operations, such as interest expenses and depreciation.
Interest on loans: The cost a company pays on money it has borrowed, for example from a bank.
Depreciation: This is the reduction in the value of business assets, such as machinery or vehicles, over a period of time. It is recognised as an expense.
Profit before taxes: This is the profit remaining after deducting all costs, including operating and other expenses, but before paying taxes.
Taxes: This is the amount a company has to pay to the government, usually a percentage of pre-tax profits.
Net profit: This is the company’s final profit after deducting all costs and taxes. It shows how much the company actually earns and retains.
How to Apply an Income Statement in your Organisation?
Preparing and using a profit and loss statement in your organisation is crucial for sound financial decision-making. This financial tool gives you a clear overview of your income and expenses. To use this information effectively, you need to collect and analyse the right data. Start by structuring your accounts so that you always have the latest figures at hand. Make sure your expenses and revenues are properly categorised. This will help you quickly understand how profitable your business is.
Use your profit and loss account to optimise costs. If you notice that certain cost items are too high, such as spending on marketing or staff costs, you can take immediate action. Compare your expenses and revenues quarterly or annually to spot trends. This will help you identify where you need to make adjustments to improve profitability. Make a cost-benefit analysis of your biggest investments. This shows whether these investments are generating the expected turnover, or whether there is room for improvement.
Making strategic decisions based on data
You can also make strategic decisions using your income statement. For example, do you want to expand into a new market? If so, first analyse whether you have sufficient financial resources. Or look at how seasonal influences affect your profits. If you see that your profits are falling in a certain period, you can anticipate this early by planning promotional activities, for example. By making a forecast based on historical data, you make realistic forecasts for the future.
Besides cost optimisation, the profit and loss statement also helps you improve your margins. Suppose you sell products. If you see that your gross margin is too low, you can negotiate with suppliers or adjust your prices. This directly affects your profits. Finally, you can be more accountable to stakeholders, such as investors or banks, when you have a clear profit and loss statement. This increases their confidence and can contribute to future investments or financing.
