What the Bottom Line Isn't Telling You

A profit and loss (P&L) statement tells a company's owners and stakeholders quite simply how it's doing, serving as a report card on financial performance. But unlike in school, this report card isn't as simple as A through F. So let's examine what a P&L statement tells you and why and how it's organized.

What does a P&L tell you? Basically, a P&L reports revenues and expenses for a specific period of time. P&Ls typically cover a month, a quarter or a year. The P&L starts off at zero at the beginning of the reporting period and summarizes the activity that occurred during the period. Most business owners start at the top of the report — the "top line" — to see how much money they brought in and then jump right to the bottom to see how much was left over after expenses — the "bottom line," net income or profit. The top line and the bottom line are critically important to understanding performance, but the important management decisions use the detail from the middle of the report.

What doesn't the P&L tell you? The P&L does not give you an accumulative score. For example, the score a sports team achieved in a game simply tells you what it scored in that game — not specifically how it played and why; nor how it's ranked in a season overall. A balance sheet is more the type of document that could summarize how a team had played over its entire season and history. P&Ls also do not give you trend data, which would tell you whether line items on the P&L are trending up or down and at what rate. The problem here is that you don't know when something is trending in the wrong direction until it becomes a serious problem. So it is important to use trend data every month in conjunction with your P&L.

How is a P&L organized? At the top of the P&L are the revenues, in the middle are the costs of goods sold, followed by expenses, with net income at the bottom. Any revenues or expenses that are not part of your normal business operations are generally called "other income and expenses."

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