A profit and loss (P&L) statement shows how money moved through a company over a period of time. It lists what funds came in, what went out, and what remains as profit. Company leaders use a P&L statement to make difficult decisions, and potential investors use it to determine whether your business is worth backing.

Below, we’ll explain what a profit and loss statement measures, how it works in practice, and how it can serve as a decision-making tool and an important record for businesses.

What’s in this article?

• What is a profit and loss statement?
  
• How does a profit and loss statement work?
  
• What’s included in a profit and loss statement?
  
• How do businesses use profit and loss statements in decision-making?
  
• What does a profit and loss statement reveal about financial health?
  
• What common mistakes do businesses make when preparing P&L statements?
  
• How do profit and loss statements differ from balance sheets and cash flow statements?
  
• How Stripe Financial Connections can help
  

What is a profit and loss statement?

A profit and loss statement, also called an income statement, is a financial report that tells you whether your business made or lost money during a given period of time. It lists what came in (revenue) and what went out (expenses), then shows the remainder: net profit if positive, net loss if negative. It’s the simplest and most direct way to understand whether the business earned more than it spent.

Companies usually prepare a P&L statement monthly, quarterly, or annually. Investors and lenders look at this document to see whether the business is profitable. Managers use it to track how revenue and costs are trending, whether margins are holding up, and whether the operation is financially sustainable.

While balance sheets and cash flow statements answer different financial questions, the P&L statement is the one that most clearly reveals whether your business model is working. A well-kept P&L shows how sales, costs, and profits change over time and whether the business is heading in the right direction.

How does a profit and loss statement work?

A profit and loss statement is built on one equation: revenue minus expenses. The answer will tell you whether you’ve made a profit or experienced a loss.

Here’s how it works:

• Revenue: All the money earned during the period.

• Expenses: The direct costs of producing what you sold or the cost of goods sold (COGS), plus all operating costs such as salaries, rent, marketing, software, and utilities.

• The bottom line: Subtract expenses from revenue, and you’ll see whether the business has earned a profit or experienced a loss.

For example, if your company pulled in $100,000 this quarter and all expenses totaled $90,000, the P&L statement would show a $10,000 profit. If expenses were $110,000, that would be a $10,000 loss.

What’s included in a profit and loss statement?

Every P&L statement tells the same type of story: how money moved through the business during a set period. The specific components of P&L can differ by industry, but the building blocks remain consistent:

• Revenue: The very top line. This is all the income the business generated from selling goods or services in the period. Some companies distinguish between gross revenue (before discounts and returns) and net revenue (after discounts and returns).

• COGS: All the direct costs tied to producing what you sold. For a manufacturer, this means raw materials and production labor. For a service business, COGS could include contractor fees or direct service delivery costs.

• Gross profit: Revenue minus COGS. This shows what’s left after covering the direct costs of production but before accounting for overhead. Companies often track gross profit as a margin (percentage of revenue) because it’s a clean indicator of efficiency. It clarifies how much you keep from each dollar of sales before you pay the rest of your bills.

• Operating expenses: These are the everyday costs of running the business that aren’t tied directly to production. Think rent, utilities, salaries for administrative staff, marketing spend, and depreciation on equipment. These can be grouped into selling, general, and administrative (SG&A) costs.

• Operating profit (operating income): Gross profit minus operating expenses. This shows how profitable the company’s core operations are before factoring in taxes or financing. If operating profit is strong, it means the core business works, even if debt or taxes later decrease net income.

• Other income and expenses: Not every financial event fits neatly into operations. Interest income, loan interest, one-off gains or losses, and unusual costs all appear here. These adjust the business’s finances beyond its core activities.

• Net profit (net income): The “bottom line.” After everything else has been accounted for, this is the profit left over (or loss incurred). A positive number means the business earned more than it spent, while a negative one means it spent more than it earned. Companies might reinvest this money, distribute it as dividends, or build reserves.

How do businesses use profit and loss statements in decision-making?

A P&L statement is the lens businesses use to decide what comes next. When reviewed on a regular basis, P&L shows where the company is gaining ground, where it’s losing traction, and where resources need to shift.

Here’s how P&L statements are used in a business context.

Spotting performance trends

If revenue is rising but profits are shrinking, that’s a clear warning that costs are outpacing sales. This could mean payroll has grown too quickly, suppliers have raised prices, or overhead has increased.

A P&L statement can also reveal which areas in a business are hidden winners or chronic underperformers. Leaders use it to decide where to invest and what to retire.

Budgeting and forecasting

If marketing expenses have been gradually rising each quarter without lifting sales, leaders can cap that budget or reallocate it. If gross margins are narrowing, it might be time to renegotiate supplier contracts or rethink pricing. The P&L statement shows what the company can afford to spend in the future.

Measuring strategy against results

Management teams and boards often set explicit P&L targets, such as improving net margins by a few points, cutting operating expenses by a set percentage, and growing revenue faster than costs. Progress (or lack of it) shows up line by line. Department heads might carry their own P&L statements and use them to prove how their functions contribute to the whole.

Communicating with outsiders

Investors, lenders, and partners pay close attention to P&L. It’s the clearest view of profitability, condensed into a format everyone can follow: sales, costs, and what’s left.

What does a profit and loss statement reveal about financial health?

A profit and loss statement clarifies how a company made or lost money and whether the pattern is sustainable.

Here’s a closer look at what these statements can reveal.

Profitability and margins

Gross profit margin (gross profit divided by revenue) and net profit margin (net profit divided by revenue) are important numbers to monitor. Gross margin shows how efficiently a business turns sales into usable income after covering direct costs, and net margin shows how much of each sales dollar is kept once every expense is accounted for. Tracking these margins period over period reveals whether a company is staying afloat.

Trends over time

One statement is a snapshot. A series of statements can tell a story. If revenue rises while net profit stagnates, that might mean expenses are eating up gains. A P&L statement that shows shrinking costs as a percentage of revenue signals healthier operations. Comparing figures from period to period helps managers catch patterns that aren’t obvious in the short term.

Operational efficiency

Line items reveal where problems might exist. If operating expenses suddenly swell from 40% to 50% of revenue, the P&L statement calls attention to that. Leaders can investigate whether those costs are justified: whether new hires, rising rents, or increased software spend are translating into growth.

Net income

Net income is often the number outsiders fixate on. Investors, lenders, and partners consider it to be a shorthand for viability. A growing bottom line signals stability, while a shrinking one raises questions. While the P&L statement doesn’t capture everything, it’s usually the first place someone looks to judge whether a business is financially healthy.

What common mistakes do businesses make when preparing P&L statements?

Here are some common errors to watch for when preparing a P&L statement:

• Poorly timed revenue: Recognizing sales too early or too late distorts results and makes growth look stronger or weaker than it is. Remain consistent in the way you recognize revenue.

• Misclassified expenses: A production cost logged as overhead throws off gross margins. Overhead that’s hidden in COGS obscures operating performance. Categories need to be clean to tell a useful story.

• Excluded noncash costs: Noncash costs such as depreciation and amortization don’t leave the bank today. But ignoring them overstates profitability and erases the true cost of assets in use.

• Miscalculated COGS: Leaving out direct inputs or adding costs that don’t belong misrepresents product margins and can lead to bad decisions on pricing or investment.

• Failure to reconcile: Numbers that don’t match bank statements or invoices invite errors and omissions. Regular reconciliation grounds P&L in reality.

Each mistake alters the narrative that the P&L statement is trying to tell, while precision and accuracy turn the statement into an important tool leaders can rely on.

How do profit and loss statements differ from balance sheets and cash flow statements?

Each financial statement answers a different question.

Profit and loss statements track revenue, expenses, and profit across a period. They answer whether the business earned more than it spent. Balance sheets are a snapshot of assets, liabilities, and equity at a single point in time. They show what the business owns, owes, and has invested. Cash flow statements follow the actual movement of money and clarify whether operations, investments, and financing are generating or consuming cash.

Together, they offer a full view of a company’s finances: profitability (P&L), stability (balance sheet), and liquidity (cash flow).

How Stripe Financial Connections can help

Stripe Financial Connections is a set of application programming interfaces (APIs) that allows you to securely connect to your customers’ bank accounts and retrieve their financial data, enabling you to build innovative financial products and services.

Financial Connections can help you:

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