How to Analyze Profit and Loss Statements

Can you explain what happened here? If you can't, your business may be in BIG trouble. If you work in strategic finance, understanding how to comprehend + explain financial data is not a nice to have...it's a MUST. It doesn't matter whether you are presenting to leadership...the board of directors...or investors. If you don't have a tight grip on your data, you'll be faced with some catastrophic surprises. Let's learn how to interpret + present this by walking through this report together 👇 ➡️ PROFIT & LOSS SUMMARY Your P&L might look decent at first glance... We beat our bottom line net income by 14% 🙌 But a closer look reveals some important details... - Revenue is down 10% ($50K below budget) This is a pretty alarming metric and may mean that your assumptions are too aggressive here. Was it because your conversions rates were lower than expected? Was churn higher than expected? - COGS is actually BETTER than expected by 40% This makes sense...your revenue was lower, so your COGS should also be lower. But there's something more interesting to address here... your gross margin was 80%, compared to your projected 70%. While the variance is favorable it highlights an important question - do you have a strong grip on your unit economics? - Operating expenses are 10% favorable compared to budget. That's good...but why? Which accounts? Was it timing? Was it a change to your plans? - Net Other Income was -$10k compared to your projected +10k. Accounts here typically relate to interest income/expense, depreciation/amortization, and non core business activity. Although $10k may not seem like a lot, it warrants an important analysis This all leads to a $15k favorable net income, which is 14% higher than expected. All done with our analysis? Not quite... We've analyzed the PROFITABILITY of our business, now it's time to analyze our CASH FLOWS ➡️ CASH FLOWS SUMMARY This is where things get puzzling: - Collections are down $70k (78% below target 🤯 ) - Inventory up by $20k over budget - Total cash flows is $35k below budget Woah! We beat earnings but missed our cash flows by 27%?? Believe it or not, this story happens all the time...and it's up to you to see the forest beyond the trees and take action QUICKLY. ➡️ PUTTING IT ALL TOGETHER Your P&L is looking OK, but there are some strong indicators that you don't have a grip on your unit economics, and your revenue projections may be a bit overstated. But the biggest issue by far is your cash flows. You were supposed to collect $90k more than you invoiced this month but instead you only collected $20k. If you have $1m in the bank that may not be too material. But if you have $200k in the bank? Now things get more dangerous. That's why it's CRUCIAL to review this report each and every period - you don't want to be taken by surprise. === How would you interpret these results? What actions would you take? Share your analysis in the comments below 👇

Numbers tell stories. But most people never learn to read them. The Profit & Loss account isn’t just for accountants It’s a window into the health of any business. If you lead, invest, or build You need to understand what drives profit (and what drains it). Here’s how to read a P&L like a pro: 1. Start with Income ↳ Revenue = Core business earnings ↳ Other income = Extra gains (investments, asset sales) → Shows how money really comes in 2. Understand Costs ↳ Raw materials & stock-in-trade = Inputs and inventory ↳ Inventory change = Adjust for what's unsold → Reveals the true cost to produce 3. Know the Operating Load ↳ Employee costs = People power ↳ Depreciation = Asset wear & tear ↳ Amortization = Software, IP losing value → These quietly erode profit 4. Watch for the Hidden Drains ↳ Finance costs = Interest and fees ↳ Other expenses = Admin, utilities, etc. ↳ Equity accounted income = JV profits → Often overlooked, but they add up 5. Adjust for Reality ↳ Tax = The share that’s not yours ↳ Non-controlling interest = Partners’ cut ↳ Exceptional items = One-off shocks → Filters noise from actual performance 6. Zoom In on Shareholder Value ↳ EPS = Earnings per share ↳ Basic vs. diluted = Current vs. potential impact → Investors watch this like a hawk 7. Beyond the Bottom Line ↳ OCI = Currency swings, pensions, asset revaluations → Not in net profit—but still crucial It’s not just math. It’s your business story in numbers. Which part do you look at first? Follow me Marc Henn for more. We want to help you Retire Early, Supercharge Your Cash Flow, and Minimize Taxes. Marc Henn is a licensed Investment Adviser with Harvest Financial Advisors, a registered entity with the U. S. Securities and Exchange Commission.

An underrated business skill: Reading P&L statements. There's hidden info in all of them. Here are 5 key things to look for in P&Ls: - 𝟭. 𝗘𝘅𝗮𝗺𝗶𝗻𝗲 𝗴𝗿𝗼𝘀𝘀 𝗺𝗮𝗿𝗴𝗶𝗻 I’m looking for 40% or higher. Any lower indicates the company is likely underperforming. Monitor a company’s gross margin over time. Is it improving or getting worse? - 𝟮. 𝗗𝗶𝗴 𝗶𝗻𝘁𝗼 𝘃𝗮𝗿𝗶𝗮𝗯𝗹𝗲 𝗰𝗼𝘀𝘁𝘀 Large or odd variable costs are likely a red flag that the business isn’t managing expenses properly. Plus, they’re much tougher to budget for. Watch these in past P&Ls. Are the variable costs consistent? Or do they fluctuate wildly? - 𝟯. 𝗣𝗮𝘆𝗿𝗼𝗹𝗹 𝗰𝗮𝗻 𝘀𝗵𝗼𝘄 𝘄𝗵𝗲𝗿𝗲 𝗽𝗿𝗼𝗳𝗶𝘁𝘀 𝗮𝗿𝗲 𝗴𝗼𝗶𝗻𝗴 Compare payroll to gross margin over the span of years and months. Is that margin being compressed over time? If margin is eroding due to payroll it’s a flag. Same thing in the opposite direction. Some businesses are running too lean. When you buy them you will need to add staff. Make sure you do a “ProForma” on how you’ll need to run the business if/when the owner leaves. – 𝟰. 𝗥𝗲𝘃𝗲𝗻𝘂𝗲 𝘁𝗿𝗲𝗻𝗱𝘀 Is revenue growing steadily, or is growth inconsistent? Small businesses are unpredictable, so don’t expect a clean line. But you can draw a trend line across many months and see if the business is trending in the right direction. As a rule we avoid businesses in decline. – 𝟱. 𝗗𝗲𝗽𝗿𝗲𝗰𝗶𝗮𝘁𝗶𝗼𝗻 Depreciation is a cost to your business. Don’t add it back when you’re calculating a valuation for the company. The assets are being worn out, and you need to replace them. Look at the last 5 years. Has yearly depreciation gone down or up? Inspect why that is. – This is a very high-level primer of P&Ls. There’s obviously much more to it than this, but I hope this gets you started.