Executives Must Know: P&L and the Necessity of Financial Management

Everyone involved in business operations, whether executives, investors, or owners, must thoroughly understand this financial document: Profit and Loss Statement (P&L). It is a key indicator that helps you understand the direction your business is heading, whether it is creating real value or just spending continuously.

Meaning of P&L (Profit and Loss Statement)

The profit and loss statement or P&L is not just a collection of numbers, but a story of the business that shows how much money was received, how much was spent, and whether there was a profit or loss during a specified period.

In fact, the P&L is a financial statement that displays the company’s performance in terms of figures, including total revenue, various expenses, and the final net profit or loss () that occurred within a certain timeframe.

This document helps entrepreneurs understand:

• Where their business’s revenue comes from
• Which areas consume the most expenses
• Which parts of expenses could be reduced
• Whether the business ultimately makes a profit or incurs a loss

Basic formula for calculating P&L

Calculating the profit and loss statement is straightforward:

Total Revenue (Total Revenue) - Total Expenses (Total Expenses) = Profit or Loss

This is the fundamental formula, which can be adapted according to various detailed steps in presentation.

Main components to know

Total Revenue refers to all income received by the business, whether from sales of goods, services, interest, dividends, or rental income.

Total Expenses are the money spent to operate the business, such as employee salaries, rent, materials and supplies, advertising, or cleaning costs.

Final result: If revenue exceeds expenses, it’s a profit ######; if not, it’s a loss.

Steps to correctly read a P&L

( Step 1: Check the year and period

Before analyzing any numbers, ensure you know which year and period this document covers, as figures can vary between years.

For example, “Profit and Loss Statement for the period from January 1, 2566 to December 31, 2566” indicates the performance for the year 2566, from start to end.

) Step 2: Identify the final result

Clearly see whether, at the end of the specified period, the business made a profit or a loss.

• If revenue > expenses = profit (The business is in good shape)
• If revenue < expenses = loss ###The business is in trouble###

Step 3: Analyze revenue sources

Different businesses have different revenue streams. Some sell products, some provide services, others earn from interest, rent, or holding investments.

Knowing where your income comes from helps understand whether the business remains strong or begins to weaken in certain revenue areas.

( Step 4: Check the expense structure

Look at which expenses are the largest, which are smaller, and which could potentially be reduced.

For example, if advertising costs are very high but do not yield proportional results, consider reducing them. If employee wages are high, think about ways to improve efficiency.

Profit layers: where are the differences?

When calculating the P&L report, multiple levels of profit emerge, each with different meanings.

) Gross Profit ###Gross Profit( Formula: Revenue - Cost of Goods Sold

Indicates how much remains after deducting the costs directly associated with producing goods or services. This level shows how much you can mark up your prices over costs.

) Operating Profit (Operating Profit) Formula: Gross Profit - Operating Expenses

This level provides a clear picture of whether the core business operations ###excluding financing or taxes( are generating profit.

) Net Profit ###Net Profit( Formula: Total Revenue - Total Expenses

This is the final figure, after deducting all expenses. It shows how much profit the business has left. This number is considered the most important because it reflects the true ability of the business to create value.

Examples of P&L presentation

) Format 1: Report Form ###Report Form( Presented like a report, flowing sequentially.

Business Name Profit and Loss Statement For the year ending December 31, 2566

Revenue

• Service income: xxx Baht
• Miscellaneous income: xxx Baht
• Total revenue: xxxx Baht

Expenses

• Office rent: xxx Baht
• Transportation: xxx Baht
• Salaries: xxx Baht
• Total expenses: xxx Baht

Net profit: xxx Baht

Advantages: Very easy to understand because it’s arranged clearly and convenient to read.

) Format 2: Account Form (Account Form) Other presentations are divided into two sides ###left and right###, like a T-shape, making the balance clear.

The left side shows expenses, and the right side shows revenue, with balancing adjustments in the middle.

Advantages: Clear, balanced, and an accepted format by government agencies.

Why is P&L so important?

1. Measure financial strength

P&L helps management see the overall financial status during the period—whether it is strong or sustainable.

2. Business decision-making

Investors use P&L to decide where to invest; banks use it to determine whether to lend; managers use it to plan for the future.

3. Track performance

Comparing P&L from different years or quarters shows whether the business is growing or declining.

4. Identify issues P&L can pinpoint where problems are—whether due to low income or high expenses—leading to targeted improvements.

5. Develop strong strategies Knowing strengths and weaknesses allows designing strategies to increase revenue or reduce costs effectively.

Key points to remember about P&L

Important information when reading P&L

• Study the year and period carefully; otherwise, comparisons may be incorrect.
• Don’t look only at the final profit figure; analyze each step.
• Compare with previous periods to see trends.
• Review each expense category to find improvement opportunities.
• Don’t forget to check revenue sources for balance and diversity.

Summary

The Profit and Loss Statement or P&L is one of the most prominent financial documents, helping everyone understand the business’s ability to generate profit. However, investment decisions or business planning should not rely solely on P&L. Other factors such as the balance sheet, liquidity, management quality, growth opportunities, and overall market conditions should also be considered.

Once you understand P&L, you will be able to make smarter, more confident financial decisions.