What is a Profit and Loss Statement? Understand the income statement that transforms your business

If you are an investor or an entrepreneur, a profit and loss statement, also known in Thai as a profit and loss report (P&L), is a document you will encounter frequently and is more important than you might think. It not only shows whether the business is making a profit or incurring a loss but also indicates smart strategic planning for the future.

Why is the Profit and Loss Statement Important to Investors and Entrepreneurs?

The profit and loss statement is not just numbers sitting in a document. It is the core of business decision-making. When you read this statement, you can see where the money is coming in from, where it is going out, and how much remains for use.

A profit and loss statement helps entrepreneurs clearly measure financial performance, whether it’s checking if gross profit is increasing or decreasing, or if expenses in each area are well-controlled. Additionally, it allows investors to efficiently assess the company’s profitability.

Basic Structure of the Profit and Loss Statement: The Formula to Remember

Calculating a profit and loss statement is straightforward once you understand the basic formula: Total Revenue – Total Expenses = Profit (or Loss)

Total Revenue is all the money coming in from sales of goods or services. Total Expenses are all the costs incurred to run the business, such as rent, advertising, or employee salaries. Profit or Loss is the difference between the two. If revenue exceeds expenses, you have a profit; if expenses are higher, it’s a loss.

For example: Suppose you own a coffee shop that sells 500,000 THB worth of coffee this month, with total expenses—including rent, coffee costs, salaries, and other costs—amounting to 350,000 THB. The resulting profit is 150,000 THB. This figure helps determine whether to expand the business or not.

Deeper Calculation: Understanding the Profit and Loss Statement Step-by-Step

The profit and loss statement isn’t just about the simple formula; there are additional calculations that provide different insights:

First: Revenue from sales and services minus Cost of Goods Sold = Gross Profit

Gross profit indicates how well you price your products relative to costs. For example, if your coffee shop sells coffee at a high price but the coffee beans are cheap, gross profit will be high.

Second: Subtract operating expenses, such as advertising and administrative costs, from gross profit to get Operating Profit. This shows how profitable the core business operations are.

Third: Deduct financial expenses, like interest on loans, and taxes to arrive at Net Income. This final figure is what the entrepreneur can actually use from the business.

What Do Different Profit Levels Mean: Decoding Gross Profit and Net Income

Having high profits doesn’t necessarily mean your business is successful, because there are different types of profit:

Gross Profit = [Revenue – Cost of Goods Sold]

It reflects sales efficiency. If gross profit is low, it indicates high costs or inappropriate pricing.

Operating Profit = [Gross Profit – Operating Expenses]

It shows the overall operational performance. This figure helps give a clearer picture of the business’s health.

Net Profit = [Total Revenue – Total Expenses]

It indicates the actual profit left after all costs, which is most important to shareholders and entrepreneurs.

Two Different Formats of the Profit and Loss Statement: Which One Fits Your Business?

There are two formats, each presenting data differently:

Report Form

This format is suitable for those who prefer clarity and easy reading. Data is arranged from revenue to net profit, narrating the business story in a straightforward manner.

The header includes the company name, the title “Profit and Loss Statement,” and the period covered. Then, revenues, expenses, and the resulting profit or loss are listed. It’s easy to understand and convenient for analyzing performance.

Account Form

This format divides the page into two sides: expenses on the left and revenues on the right, balanced like a scale. Businesses with advanced accounting systems often use this format.

Its advantage is providing a comprehensive view of operations, with clarity and ease of understanding, and it is widely accepted by government agencies.

Choosing which format depends on your business needs and how you want to present the data to management. Many companies prepare both to maximize benefits.

The True Importance of Preparing a Profit and Loss Statement

For managers and investors, the profit and loss statement plays an irreplaceable role:

Assessing Financial Performance: It provides an overall view of the business’s financial health, whether good or bad.

Providing Data for Analysis: The information helps analyze the company’s financial condition and make informed investment decisions.

Indicating Profitability: By examining profits at each stage, you can see how efficiently the business generates profit.

Supporting Strategic Planning: This report is vital for adjusting business strategies—whether reducing costs, increasing revenue, or changing sales tactics—to optimize performance.

How to Read a Profit and Loss Statement Like a Pro: 4 Essential Steps

Step 1: Check the Period

First, identify the period covered by the statement—monthly, quarterly, or yearly. For example, “Profit and Loss Statement for the period from January 1, 2023, to December 31, 2023,” means data covers the entire year. Quarterly reports may show different results.

Step 2: Determine Profit or Loss

Look at the net profit figure—positive indicates profit, negative indicates loss. For example, in 2022, the Bank of Thailand had a net profit of 191,077,634,015 THB, showing normal operations and profit generation.

Step 3: Examine Revenue Sources

Identify where the income comes from. For example, a bank might have revenue from five sources: interest income, gains from sale of investments, fees, foreign exchange, and other income. If income relies heavily on one source, the business may face higher risk.

Step 4: Analyze Expenses

Review where the money is spent. How many expense categories are there, and how large are they? For example, a bank might have four expense areas: interest expenses, losses from investment sales, employee costs, and other expenses. If expenses grow faster than revenue, it’s a warning sign.

Summary: Why You Must Understand the Profit and Loss Statement

The profit and loss statement is more than just numbers on paper; it tells the story of your business—how it operates and its financial vitality. When you understand the P&L, you can identify strengths and areas needing improvement.

In investing or running a business, reading the profit and loss statement is a vital skill. But remember, don’t rely solely on it—consider other factors such as business nature, management team, resilience, and market trends. By mastering a thorough understanding of the P&L, you will be empowered to make sharper, more accurate financial decisions.