Digit Lime Blog

How to Read a Profit & Loss Statement

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1 minute read | Published May 13, 2023

A Profit & Loss Statement (P&L) is exactly what it sounds like. It shows you "the bottom line" or profit your business made over a period of time.

First, it'll show you sales - then, cost of those sales - and lastly, it'll subtract out expenses to show how much money is left over (a.k.a. profit).

To make more sense of this, lets walk through a simple example:

In March of 2023, Joe's Diner sold $45K worth of food and beverages. That's a lot of eggs🍳, bacon🥓 and coffee☕️!

The next line, COGS, stands for "Cost of Goods Sold," which is the accounting term for how much was spent on the items sold. For example, if the diner charges $4 for a cup of coffee and it was $1 for the coffee beans, $4 would show up under sales and $1 in COGS. This happens over and over with every item and eventually creates the totals you see above ($45K sales and $15K COGS).

Gross Profit is just Sales minus COGS. This number shows how much you're actually making on the items you sell.

Next, we have expenses. Basically, these are any money spent that isn't directly tied to a sale. Things like rent, marketing, utilities, supplies, maintenance, etc.

Once these are subtracted out, you'll have Net Profit (or Net Loss).

Pretty easy, right? Once you understand the basics, reading financial statements can be super insightful and help you understand your business, leading to better decisions.

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