Reading and understanding a profit and loss statement
The profit and loss statement is one of the most important financial overviews. Learn how to read it, what the line items mean and which signals you should recognise.
What is a profit and loss statement?
The profit and loss statement (P&L) is a financial overview that shows the revenues and costs of your business over a given period, usually a quarter or financial year. The difference between revenues and costs is your result: profit or loss. The P&L is also called the income statement and is an essential part of your annual report. The most important ratios you derive from the P&L are the gross margin (gross profit as a percentage of revenue) and the net margin (net result as a percentage of revenue). A declining gross margin may indicate rising purchase costs or prices that are too low. In Giroo you generate a P&L with one click for any desired period and can compare quarters or years.
Structure
A typical profit and loss statement looks like this:
| Line item | Amount |
|---|---|
| Net revenue | € 120,000 |
| Cost of goods sold | -€ 35,000 |
| Gross profit | € 85,000 |
| Personnel costs | -€ 25,000 |
| Accommodation costs | -€ 8,000 |
| Office costs | -€ 3,000 |
| Depreciation | -€ 5,000 |
| Other costs | -€ 4,000 |
| Operating result | € 40,000 |
| Financial income/expenses | -€ 1,500 |
| Result before tax | € 38,500 |
Important ratios
Gross margin
Gross profit as a percentage of revenue. The higher, the better.
Formula: (Gross profit / Revenue) × 100
In our example: (€ 85,000 / € 120,000) × 100 = 70.8%
Net margin
Net profit as a percentage of revenue.
Formula: (Net result / Revenue) × 100
In our example: (€ 38,500 / € 120,000) × 100 = 32.1%
Signals to watch for
- Declining gross margins — your selling price is too low or your purchase costs are rising
- Rising personnel costs as % of revenue — you are growing in costs but not in revenue
- High depreciation — you have invested heavily; is it profitable?
- Negative operating result — your core activity is loss-making
Tip: also read our article on improving cash flow and the basics of bookkeeping.
Profit and loss statement in Giroo
In Giroo you generate a profit and loss statement with one click for any desired period. You can compare periods (this quarter vs. last quarter) and export to PDF or Excel for your accountant.