In this article, we'll learn to read the profit and loss statement (also known as the "income statement" or P&L) - a fundamental tool for understanding how the revenue and expenses of your business stack up. The P&L in LivePlan shows your revenue, your expenses, and the difference between the two — that is, your net profit or "bottom line." At a glance, it can tell you if your business is profitable or not.
How to read the profit and loss statement
To locate the profit and loss statement (P&L) in LivePlan, click on the Forecast tab and then Profit & Loss:
Here's a quick line-by-line explanation of the P&L:
Note: You can expand and collapse lines of this table to see more details.
Revenue: The top line of the P&L is the money that you have coming in from sales (before any deductions). In a sense, the top line of your income statement is just as important as the bottom line (net profit) - all of the direct costs and expenses will be taken out of this beginning number. The smaller your top-line revenue number is, the smaller your expenses need to be if you’re going to stay profitable.
Direct Costs: Also referred to as the Cost of Goods Sold (COGS), these are the costs that go into making your products or delivering services. You wouldn’t include items such as rent for an office space in this area, but you would include the things that directly contribute to the product you sell. For example, to a bookstore, direct costs are what the store paid for the books it sold; but for a publisher, direct costs include authors’ royalties, printing, paper, and ink. If you only sell services, it’s possible that you have few or no direct costs. For more details, see What is the difference between direct costs and expenses?.
Gross Margin: Gross margin (or gross profit) is the difference between the revenue and direct costs on your P&L. Gross margin tells you two important things: how much of your revenue is being funneled into direct costs (less is better), and how much you have left over for all of the company’s overhead expenses. If your gross margin is smaller than the amount you need to cover your expenses, you’re not going to be profitable.
Operating Expenses: Operating expenses are a list all of your overhead expenses, excluding your direct costs. This includes everything your company pays for to keep the doors open: rent, payroll, utilities, marketing, etc.
Operating Income: Operating Income is also referred to as EBITDA, or earnings before interest, taxes, depreciation, and amortization. This line is a simple statement of your profitability, although there will be some additional subtractions, as shown below.
Interest Expense: Here you'll see any interest payments that your company is making on its loans.
Income Taxes: This line will reflect the income tax amount that has been paid, or the amount that you expect to pay.
Depreciation and Amortization: These are expenses associated with your asset purchases, both short-term and long-term. Over time, long-term assets lose their value, or depreciate. With short-term assets (like copyrights or patents), the value is amortized, or distributed, over a number of months.
Total Expenses: Total expenses takes into account all of the expense items in the P&L. This total includes your Direct Costs, Operating Expenses, Interest Expense, Income Taxes, and Depreciation & Amortization.
Net Profit: Net profit, also referred to as net income or net earnings, is the proverbial "bottom line." Remember that this number started at the top line, with your revenue from sales. Then everything else was subtracted from that initial sum. If this number is negative, you’ll know that you’re running at a loss. Either your expenses are too high, your revenue is in a slump, or both—and it might be time to reevaluate your strategy.
Adjusting numbers in the profit and loss statement
Some lines of the P&L can be expanded to show the individual forecast entries that are calculated into them. For these lines, you'll see an expand/collapse arrow to the left. Clicking that will expand the line. To adjust the numbers on the P&L., you can click on any of the blue links for revenue streams, direct costs, direct labor, or expenses:
This will open the entry and allow you to directly edit the numbers related to that item. For more details, see How to I edit or delete forecast entries?.
Adding revenue, expenses, etc. from the profit and loss statement
LivePlan also allows you to add revenue streams, direct costs, personnel, or expenses from the profit and loss statement. To do this, just click the appropriate button below the P&L:
This will open the appropriate overlay for that item:
Just follow the steps in the overlay to add the item.
Editing the Profit and Loss
In LivePlan, you can't edit the Profit and Loss directly - instead, you'd edit the individual forecast entries that are calculating into the P&L. Click on the Forecast tab of LivePlan, and then navigate to the page of entries you need to edit. You can click on any entry to update its contents.