Why do investors and entrepreneurs need to read the (Profit and Loss Statement)?

Profit and Loss Statement or what the financial system calls the Profit and Loss Statement (P&L) is an essential document that both management and investors attach great importance to. Why? Because it shows how much value your business has created over a certain period.

What is a Profit and Loss Statement and why is it important?

The Profit and Loss Statement is a financial report that summarizes the company’s operational results, clearly showing both incoming revenue, outgoing expenses, and the difference between the two. Whether the business makes a profit or a loss depends on the figures in this form.

For entrepreneurs, the profit and loss statement is a tool that helps decide:

• Is the business truly profitable?
• Where does the money come from?
• How is the money spent?
• Which expenses need to be reduced?

This information helps plan smart strategies for growth and market competition.

Basic formula of the profit and loss statement: simple but powerful

To explain simply:

Total Revenue − Total Expenses = Profit or Loss

• Total Revenue (Total Revenue): The total money received from selling goods/services
• Total Expenses (Total Expenses): The total money spent on operations, such as rent, advertising, salaries, etc.
• Result: If revenue exceeds expenses = profit, if less = loss

Example of calculating a profit and loss statement: look at the real thing

The correct way to read a profit and loss statement is to look at each level of profit:

Key components of each element

• Sales and Service Revenue (Sales): The main income of the business
• Cost of Goods Sold (COGS): Raw materials + wages + manufacturing costs
• Gross Profit (Gross Profit): Indicates how well the business prices its products compared to costs
• Selling Expenses (Selling Expenses): Advertising, marketing, transportation, commissions
• Administrative Expenses (Administrative Expenses): Training costs, office rent, management salaries
• EBIT: Shows whether operational activities generate profit
• EBT: Profit after deducting all expenses except taxes
• Net Income: The final profit that shareholders can actually keep

“What does each profit level tell?” - Reading between the lines

Profits appearing at different levels have different meanings:

Gross Profit (Gross Profit): Shows whether “the company prices its products cheaply or expensively.” A high gross profit indicates the business can earn more from sales than the costs of production.

Operating Profit (Operating Profit): Indicates “whether the business management is efficient.” Including various expenses like marketing and administration. A good figure suggests effective cost optimization (Operating Cost).

Net Profit (Net Profit): The “real” profit that management retains after deducting all expenses, including interest and taxes. A high net profit = a strong business.

There are 2 types of profit and loss statements: you should know the difference

1. Report Form Profit and Loss Statement (Report Form)

• The “news” structure — arranged from revenue → expenses → net profit
• Easy to understand because it follows a logical order
• Emphasizes an overview of operational results
• Suitable for presenting to management and investors

Example: