The Profit and Loss (or Income) Statement is one of three financial statements every public company issues quarterly and annually (the other two are the balance sheet and the cash flow statement). Of the three, it is often the most popular and common financial statement in a business plan since it quickly shows how much profit (or loss) was generated by a business over a specified period of time.
It is not uncommon to run the statement monthly to keep track of how a company is faring. By running this report regularly, it allows businesses to spot trends over time, and to compare months or seasons over multiple years. It is the perfect tool to assess a business, to spot strengths and weaknesses. This allows companies to expound upon their strengths and to make changes in weak areas; thereby, allowing a business to run more effectively, increasing profits by increasing revenue or minimizing expenses.
The power of the P&L is that it takes a look at how a business is doing over a period of time on its own merit, without taking into consideration non-essential assets and liabilities.
Basically, a Profit and Loss Statement takes the total of your sales and subtracts the Cost of Goods Sold (COGS) for your gross income. It then subtracts your business operating expenses, taking into account such things as interest and taxes, and adds in any other forms of increase such as interest earned. The amount remaining is your net profit (or loss) for that time period.
A Profit and Loss statement is critical to the health of a business, without it a business owner is left making uninformed decisions, which may cause them to run their business into the ground.