Written byA profit and loss statement (P&L) is the report that lists a business's revenue and expenses over a period and shows whether it made money or lost it.
Also known as: P&L, profit and loss, income statement, P and L
Key points
- It sits alongside the balance sheet and the cashflow statement as one of the three core financial statements.
- Revenue minus cost of goods sold gives gross profit; take off operating expenses, interest, depreciation and tax and you reach net profit.
- Lenders read the P&L for two things: can the business service a business loan, and is the trend up or down.
- Profit is not cash: a business can show a profit and still run out of money if customers pay slowly or stock piles up.
What a P&L shows
The statement runs top to bottom. Sales or revenue come first, then the direct costs of producing what was sold, leaving gross profit. Operating expenses follow: wages, rent, vehicles, insurance, marketing, software. Take off depreciation and what is left is earnings before interest and tax; take off interest and tax and you reach net profit, the figure people mean when they ask whether the business made money.
It always covers a period, whether a month, a quarter or a financial year, rather than a moment in time. Accounting software produces one on demand; the version an accountant prepares at year end, on an accruals basis and reconciled to the tax return, is the one that carries weight outside the business.
How lenders use it
For a full doc business finance application the lender usually wants the last two years of accountant-prepared P&Ls, sometimes with year-to-date management figures. It starts from net profit and adds back items that are not real cash costs or will not recur: depreciation, interest on debts being refinanced, one-off expenses and, in an owner-operated business, part of the owner's wages.
The adjusted figure is what the lender measures repayments against in its serviceability test, alongside the balance sheet, BAS and bank statements it uses to check the P&L is telling the truth. A profit that does not show up in the bank account gets questions.
Reading your own P&L
The useful numbers are the ratios and the trend rather than the total. Gross margin, meaning gross profit as a share of sales, tells you whether pricing covers the cost of the work. Comparing operating expenses month on month shows costs creeping up before they hurt. A profit that shrinks while sales grow usually means margin is leaking somewhere.
The P&L also explains why a profitable business can feel broke. It records sales when they are invoiced, not when they are paid, and it ignores loan principal, asset purchases and the owner's drawings. Those live on the balance sheet and in working capital, which is why the three statements are read together.
Example
A signage business in Geelong applies for finance on a large-format printer. The lender asks for two years of P&Ls. Net profit looks thin, but the broker walks the assessor through the add-backs: depreciation on the existing machines, interest on an old loan the new finance will replace, and a one-off legal bill from a lease dispute. The adjusted earnings comfortably cover the proposed repayments. The lender cross-checks the sales figures against the last four BAS and the deposits on the bank statements, and approves the deal on full doc terms.
Not to be confused with
- Balance sheet
- the balance sheet is a snapshot of what the business owns and owes on one day, while the P&L covers a period
- Cash flow
- cashflow tracks money in and out, which can diverge sharply from profit
Frequently asked questions
What is the difference between a P&L and a balance sheet?
The P&L covers a period and shows income, expenses and the resulting profit or loss. The balance sheet is a snapshot on one date showing assets, liabilities and equity. Profit from the P&L flows into equity on the balance sheet, which is why lenders read both together: one shows performance, the other shows position.
How many years of P&L does a lender want?
For full doc business finance, usually the last two financial years prepared by an accountant, plus year-to-date figures if the last year end is more than a few months old. Some lenders accept one year for smaller amounts, and low doc options replace the P&L with BAS, bank statements or an accountant's letter.
What are add-backs on a P&L?
Expenses a lender adds back to net profit because they are not cash costs or will not continue: depreciation and amortisation, interest on debt being refinanced, genuine one-off costs, and sometimes owner wages or super above a market rate. Add-backs lift the earnings figure used to assess serviceability, so they need to be documented.
Can I get finance without a P&L?
Yes, through low doc finance. Lenders substitute other evidence of income: recent BAS, business bank statements, an accountant's letter or a signed declaration of income. The trade-off is usually a smaller lender panel, a lower loan amount or a higher rate than full doc terms, so a current P&L is worth having when you can get one.
Why does my P&L show a profit when there is no cash in the bank?
Because the P&L records sales when invoiced, not when paid, and leaves out things that consume cash without being expenses: loan principal repayments, buying equipment or stock, and drawings. Slow-paying customers, growing stock and asset purchases all soak up cash while the P&L still shows a profit. The cashflow statement is where that shows up.
Related terms
Balance sheet
A balance sheet is a financial statement that shows a business's financial position at a specific date: what it owns (assets), what it owes (liabilities) and the owners' equity.
Read definitionCash flow
Cash flow is the movement of money into and out of a business over a period; unlike profit, it tracks actual receipts and payments, so it measures liquidity.
Read definitionBusiness loan
A business loan is finance for business operations, capital expenditure or growth, repaid with interest, either over an agreed term or as a revolving limit you draw and repay.
Read definitionServiceability
Serviceability is a lender's test of whether you can afford the repayments on a loan from your income, after living costs, existing debts and a rate buffer.
Read definitionEarnings before interest and tax (EBIT)
Earnings before interest and tax (EBIT) is a business's operating profit before financing costs and tax, showing what core operations earn regardless of debt levels or tax rates.
Read definitionDepreciation
Depreciation is the fall in an asset's value over time, spread across the years the asset is used so the cost can be claimed as a tax deduction.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.