How to Read a Profit and Loss Statement

In order to provide the best level of care to your patients, you have to take care of your finances, too! A profit and loss statement is a necessary tool for understanding your practice’s financial performance. When you learn how to use this tool, you’ll come to realize extra opportunities to expand your business, provide better care to your clients, and pay yourself more. In this blog, we will equip you to take control of your cash flow by teaching you how to read a profit and loss statement. You will learn how to interpret each item in the statement and receive three bonus tips for how to make the most of it.

What is a Profit and Loss Statement?

A profit and loss statement is a financial report that provides an overview of a company’s revenues, expenses, and profits/losses over a given period of time (typically a month, quarter, or year.) It is also commonly called an income statement. 

If your revenue exceeds your expenses on your profit and loss statement, your practice is profitable. If your revenue is less than your expenses, that indicates that your practice is at a loss for that period of time. Once you learn how to read a profit and loss statement correctly, you can understand the financial health of your practice.

How does a P&L differ from a balance sheet?

Sometimes a profit and loss statement is confused with a balance sheet, but there is one profound difference. A balance sheet includes a snapshot of a business’s finances at a single point in time. A profit and loss statement focuses on a business’s finances over a period of time. Whereas a balance sheet is more like a photograph, a P&L statement is more like a video sequence. It has a beginning and an end, so it can tell you a story about your practice’s growth.

Overall, a P&L statement will show you if your business is making a profit. You’ll quickly be able to tell if  you are generating enough revenue to pay yourself and cover your expenses. It will show you where the majority of your money is spent and if you can lower any of your costs.

In order to read a P&L statement, you need to know what is on it. In the next section, you will learn about the eleven categories in your statement.

The 11 Components of a Profit and Loss Statement 

1. Revenue: The top line of your profit and loss statement is your revenue. This is the money that comes in from sales before any deductions. If you want to stay profitable, your revenue should be larger than everything else on your statement.
2. Costs of Goods Sold (COGS): People also refer to these as direct costs. These costs go directly to making your products. For instance, as a medical practice, you would include the equipment necessary for performing your service in the COGS section. However, you would not include any rent you pay or electricity bills.
3. Gross Profit: This is the difference between your revenue and direct costs. It tells you how much of your revenue goes directly to keeping your business functioning. Your gross margin also tells you how much you have left to cover the rest of your company’s expenses.
4. Operating Expenses: This component of your profit and loss statement includes the rest of your expenses (i.e. utilities, rent, marketing, payroll, etc.) This does NOT include your COGS.
5. Depreciation and Amortization: These numbers depict the value of your assets. Long-term assets lose their value over time (depreciate), whereas the value of short-term assets is amortized (or distributed) over time.
6. Interest Expense: This number indicates the amount of interest your company is paying on its loans.
7. Total Expenses: Your total expenses are the sum of your direct costs, operating expenses, interest expenses, income taxes, and depreciation and amortization.
8. Operating Profit: This number is your gross profit minus your operating expenses. It indicates your total earnings before interest, taxes, depreciation, and amortization. 
9. Income Taxes: Depending on the time frame, this number will either depict the amount of income tax that you have paid, or the amount that you expect to pay. 
10. Net Profit: This is your bottom line! If the number is negative, you’ll know that your business has not been profitable that year. 
11. Net Profit %: Net Profit Percentage indicates how much of your revenue is net profit. For example, if your profit and loss statement indicates that your Revenue totals $1,000 and the total expenses are $200, then the next profit is $800. Your Net Profit Percentage would be 80%.

3 Tips for How to Read a Profit and Loss Statement 

1. Be Clear.

Now that you know how to read a profit and loss statement, you can alter the terms on your statement to reflect what your practice does. For instance, you could break your revenue up into multiple streams, such as procedures and consulting. Instead of COGS, you could specifically list out the goods and services your service provides. This helps you personalize your P&L which can make it easier to read.

2. Compare P&L statements from multiple periods of time

One of the advantages of a profit and loss statement in comparison to a balance sheet is that you can analyze your progress month-to-month or year-to-year. This helps you understand any growth, stagnation, or decline that might have occurred. In order to fully leverage the potential of your P&L statements, you should look for trends!

3. Have a ‘Profit First’ Mentality

The typical way of reading a P&L statement is ‘revenue minus expenses equals profit.’ However, at Every Single Bean, we encourage you to flip the equation: ‘sales minus profit equals expenses.’ The math is the same, but the outcome is entirely different. When you read your P&L statement, prioritize your own salary. This will ensure that your expenses don’t outweigh your ability to pay yourself when the time comes. If you want to be sustainable, it is important to pay yourself first.

[To learn how to have a profit-first mentality, download our free Profit First Guide!]

We hope that this blog helped you understand how to read a profit and loss statement. At Every Single Bean, we believe in the power of naturopathic medicine and we want your practice to be a success. Contact us if you want help to simplify your books, streamline your business, and profit every month.