Your Business Story in Numbers: What the P&L Statement Tells You

When someone asks, "How's your business doing?", what do you say?

Most founders or SME owners instinctively talk about sales growth, new clients, or day-to-day challenges. But behind all that is a more objective, silent storyteller - your Profit & Loss Statement (also known as the Income Statement).

It tells the story of your business in numbers, highlighting what worked, what didn't, and what's changing. Think of it as your company's annual progress report. Just like a school report card, it shows whether your performance was exceptional (AA+), good (A+), or needs improvement. It's an honest reflection of how your business has performed.

Let's break it down in plain language.

What is a Profit and Loss account?

Profit and Loss account or income statement is part of the financial statement. It's a summary of your business performance over a specific period - typically a month, quarter, or year.

It tells you:

• How much revenue you have generated
• How much did you spend (Expenses)
• And what's left after all that (Profit or Loss)

Simple, right? But the insights it holds go far deeper.

The Key Parts of a P&L - And what they tell you

1. Revenue or Income (or Sales)

Under this head, all income earned by the business during the reporting period is recorded, whether from the sale of products or the provision of services. Revenue includes both cash and credit sales, regardless of whether the payment has been received.

It also encompasses:

Unbilled Revenue: Income for services already rendered, but where the invoice has not yet been raised. This is recognized under accrual accounting since the earning process is complete.

Deferred Revenue: Amounts received in advance from customers for goods or services yet to be delivered. Although the cash is received, this portion is initially recorded as a liability and gradually recognized as revenue when the service or product is delivered.

This comprehensive approach ensures that revenue reflects the actual business activity for the period, aligning with the accrual principle of accounting.

2. COGS (Cost of goods sold) or COS( Cost of service)

Cost of goods or Cost of service means the direct costs incurred to produce the goods or deliver the services that a company has sold or rendered during the period.

For a Product-based Company:

If your revenue is ₹1,00,000 from product sales, then COGS would include:

• Purchase cost or manufacturing cost of goods sold
• Direct freight/shipping
• Packaging (if directly tied to the product)
• Direct labor (if manufacturing is in-house)

COGS = Only for the products sold, not for unsold inventory.

For a Service-based Company:

COGS (or Cost of Services) includes:

• Salaries of staff directly involved in delivering the service
• Software licenses or tools used specifically for the service
• Travel, communication, or any expenses incurred for that specific service

For Example:

If your revenue is ₹1,00,000 from IT consulting:

₹60,000 - consultant salary for billed hours

₹10,000 - travel for the project

₹5,000 - tool/software used for the project

Total Cost of Services = ₹75,000

3. Gross Profit

Gross Profit is the profit a company makes after deducting the cost of goods or services sold (COGS) from its revenue.

Gross profit isn't just a number - it's a key strategic metric for pricing, product mix, vendor negotiation, and unit economics

Mathematically, gross profit is calculated as below:

Gross Profit = Revenue - COGS

What does this tell the Founder?

• Is the business scalable?
  For example, 8% margin is quite low - is this enough to cover Opex and still leave a net profit?
• Are we pricing correctly?
  Should you renegotiate client billing rates or control staffing costs?
• Are we mixing too many low-margin products?
  Analyze by segment - maybe a few product segments have very low margins and are pulling down overall gross margins.
• What's our break-even point?
  If fixed Opex is ₹3.5 lakh/month, we barely cover it. More volume or better rates are needed

Why Gross Profit is Important:

• It shows how efficiently a business is producing or sourcing its goods.
• It helps track whether your core product is profitable before accounting for admin, sales, and overhead costs.
• Forms the base for calculating Gross Profit Margin:
  A falling gross margin could mean rising input costs or pricing pressure

4. Contribution Margin

Contribution margin is somewhat similar to Gross profit. Contribution Margin (CM) tells you how much money is left from sales after covering variable costs, and how much is available to cover fixed costs and profit.

While calculating Gross profit, COGs include both fixed and Variable costs, and in computing contribution margin, we consider only variable costs.

It measures how much is left to cover fixed costs and generate profit. Contribution Margin is used more for Internal decision-making.

5. Operating Expenses.

These are indirect expenses: rent, salaries (non-production), marketing, admin, software, etc, and all other indirect expenses.

This is where small businesses often bleed cash unknowingly.

6. EBITDA - Earnings before interest, Tax, depreciation, and amortisation

It shows how much profit a business generates from its core operations, before the impact of financing (interest), taxation, and non-cash expenses (depreciation and amortization).

A positive and growing EBITDA indicates the business is operationally healthy, can fund its growth, and is attractive to investors or lenders.

Why Certain Items Are Excluded:

Interest Expense:
Not part of core operations; depends on the company's financing structure (debt vs equity).
Two companies doing the same business could have different interest costs.

Tax:
A statutory obligation based on profits, not an operating cost.

Depreciation & Amortization:
Non-cash expenses that spread the cost of long-term assets over their useful life.
While the cost has already been incurred, EBITDA removes these to focus on cash-generating ability.

EBITDA is a strong indicator of core business performance - it tells whether the business is generating enough operating profit before external factors like interest and taxes, and non-cash accounting adjustments. However, EBITDA should not be the only metric used, as it ignores debt levels, capital expenditures, and working capital needs.

7. Net profit

Net Profit, also known as Net Income or the Bottom Line, is the final profit a business makes after deducting all expenses - including operating expenses, interest, taxes, and any other costs - from its total revenue.

It reflects the true profitability of the business and answers the ultimate question: "How much money did the business make?"

Net Profit appears at the very bottom of the Profit & Loss (P&L) Statement, which is why it's often referred to as the "bottom line." This figure represents the company's final profit after accounting for all revenues, operating expenses, interest, taxes, depreciation, and amortization.

Once determined, the net profit is carried forward to the Balance Sheet. It is added to Retained Earnings, which form a part of the Reserves and Surplus under Shareholders' Equity. This accumulated profit can be used for reinvestment, paying dividends, or strengthening the company's financial position.

Conclusion: Turn Numbers Into Business Power

Profit & Loss statement isn't just an accounting formality - it's your business story, written in numbers. Every line reveals something critical: how well you're serving customers, how efficiently you're operating, whether your pricing works, and how resilient your model is.

Many founders and SME owners get caught up in the chaos of daily operations, but those who pause and read their P&L regularly gain a powerful edge. They don't just guess; they know. They make informed decisions on hiring, pricing, marketing, and expansion - all based on real financial performance.

So don't leave your business story unread.

Start reviewing your P&L monthly. Ask questions. Spot patterns. Take action.

Because when you understand your numbers, you're not just running a business - you're building a stronger, smarter, and more sustainable one.