While the balance sheet is a snapshot of your business’s financials at a point in time, the profit and loss statement shows you how profitable your business was over an accounting period, such as a month, quarter, or year. It shows you how much you made (revenue) and how much you spent (expenses).

Profit and Loss Terms:

Revenue: how much you earned from selling products or services

Cost of Goods Sold (COGS): the total amount it cost you to make the product or service 

Gross Profit: tells you how profitable your products or services are.

Gross Profit = Revenue – COGS

Operating Expenses: the cost of running your business, not including COGS

Net Profit: tells you how profitable your business is. Net Profit = Gross Profit – Operating Expenses

When you subtract the COGS from revenue, you see just how profitable your products are. This is very useful.

If your COGS and revenue numbers are close together, that means you’re not making very much money per sale.

Just because your products are profitable, doesn’t mean your business is profitable. You could be making a lot on each sale but spending so much on payroll that you walk away with nothing.

Looking back over your income statements, you’ll be able to see which months you spent more on advertising, and roughly how often you need to pay for maintenance.

More importantly, you’ll be able to plan ahead for more expensive months and know roughly how much money to set aside for maintenance.

You can only get this kind of information from the profit and loss statement.