What is a profit and loss statement — and how does payroll impact it?

Managing a business means keeping a close eye on your finances, and one of the most critical financial reports is the profit and loss (P&L) statement. This document breaks down your company’s revenue, expenses, and profits over a set period, whether monthly, quarterly, or annually.

For small businesses and startups, understanding and maintaining an accurate P&L statement is crucial for financial decision-making, investor confidence, and long-term growth. And with payroll often one of the largest expenses for businesses, this can have a significant impact on how your P&L statement looks.

In this guide, we’ll fully break down what a P&L statement is, how to create one, and why payroll accuracy is essential for keeping your company’s financials in check.

What is a profit and loss statement?

A P&L statement — also sometimes known as an income statement — is a formal financial report that summarizes your business's revenues, costs, and expenses over a specific period (usually a year or quarter). It provides insight into whether your company is profitable, or operating at a loss.

Businesses typically use a P&L statement to:

• Track profitability over time

• Identify trends in revenue and expenses

• Make informed financial decisions

• Demonstrate financial health to investors or lenders

P&L statements should not be confused with balance sheets (which provide a snapshot of your company’s assets, liabilities, and equity at a specific point in time), or cash flow statements (which track how cash flows in and out of your business).

The P&L statement is essential because it directly reflects how efficiently your business generates revenue, and manages its expenses.

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What are the key components of a profit and loss statement?

P&L statements are broken down into several key sections that provide a clear picture of your company’s financial performance. Each section plays an important role in determining whether a business is profitable and where costs may need to be adjusted, as follows:

1. Revenue (the “top line”)

This is the total amount of money your business earns from its core activities, such as selling products or services. It’s also known as sales revenue or operating revenue.

Revenue can be further categorized into:

• Operating revenue: Income from primary business activities (e.g., sales and service fees).

• Non-operating revenue: Income from secondary sources (e.g., interest earnings and asset sales).

For instance, if your company sells 1,000 units of a product for $50 each, your revenue for that period is $50,000.

2. Cost of goods sold (COGS)

COGS represents the direct costs of producing your goods or delivering services. These are expenses that directly impact revenue generation.

COGS typically includes:

• Raw materials and supplies

• Direct labor costs (e.g., factory workers and service providers)

• Manufacturing expenses

• Shipping and handling (if applicable)

If your company spends $20,000 on raw materials and shipping to produce its products, then your COGS is $20,000.

3. Gross profit

Gross profit is simply the amount left after subtracting COGS from revenue. It shows how efficiently your business produces its goods or services before accounting for operating expenses.

If your revenue is $50,000 and your COGS is $20,000, your gross profit is $30,000.

4. Operating expenses (OPEX)

These are the day-to-day expenses required to run your business. Unlike COGS, operating expenses are indirect costs that don’t directly contribute to production.

Common operating expenses include:

• Payroll (including salaries, wages, and benefits)

• Rent and utilities (e.g., office space, electricity, and internet)

• Marketing and advertising

• Insurance and legal fees

• Office supplies and software subscriptions

For instance, if your company spends $10,000 on salaries, $3,000 on rent, and $2,000 on marketing each month, your total operating expenses amount to $15,000.

5. Operating profit

This is also known as operating income and represents the profit left after deducting operating expenses from your gross profit. It shows how profitable your business is from its core operations before accounting for taxes and interest.

If your gross profit is $30,000 and your operating expenses are $15,000, the operating profit is $15,000.

6. Other income and expenses

This section includes non-operating gains and losses, such as:

• Interest income from bank accounts

• Interest expenses on loans or credit lines

• One-time gains or losses (e.g., selling equipment or legal settlements)

For example, if your business earns $1,000 in interest income but pays $2,000 in loan interest, it records a net expense of $1,000.

7. Net profit (the “bottom line”)

Net profit, also called net income, is the final amount your company earns after deducting all expenses, including taxes and interest. It uses the following formula:

Net profit = operating profit + other income – other expenses – taxes

A positive net profit means your business is profitable, while a negative net profit (net loss) indicates the company is spending more than it earns.

In our example, if the operating profit is $15,000, other expenses total $1,000, and taxes amount to $3,000, the net profit is $11,000.

By understanding these components, you can more clearly track your company’s financial health, identify cost inefficiencies, and make smarter financial decisions.

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How does payroll impact your profit and loss statement?

Even though it’s only one small part of the wider P&L process, payroll is usually the largest expense for a business, which means it will likely play a critical role in your financial reporting.

Here’s how payroll directly affects a P&L statement:

• Payroll expenses appear under OPEX. As mentioned, salaries, wages, and benefits fall under operating expenses, and can significantly impact your net profitability.

• Payroll taxes and benefits increase your total costs. Employer-paid taxes, insurance, and benefits must be accounted for in your calculations.

• Inaccurate payroll can distort your financial reports. Missing or inaccurate payroll data can misrepresent your financial health and lead to compliance issues.

This is why having accurate, integrated payroll software is essential, ensuring your payroll expenses are correctly categorized and reflected in your P&L statement.

How does payroll software help?

Modern payroll software solutions — like Remote Payroll — help streamline the financial reporting process and reduce costly errors. Specifically, our Payroll platform includes:

• Automated payroll entries. This eliminates manual data entry, saving you time, drastically reducing human errors, and ensuring payroll costs are always up to date.

• Full payroll tax compliance. We ensure that you are withholding and paying the right amount for each employee, regardless of where they are based. This not only ensures full compliance with local laws, but ensures you have a full picture of your payroll expenses.

• Integration with accounting tools. Remote Payroll integrates seamlessly with all major accounting tools, making the process quick and painless.

Ultimately, a P&L statement is one of the most critical financial reports for small businesses and startups. It shows whether your business is profitable, where you’re spending the most money, and how payroll costs impact your bottom line.

By using an integrated payroll solution like Remote Payroll, you can ensure your payroll expenses are accurately recorded, reducing errors and improving financial visibility.

To learn more — and to see how else Remote Payroll can save you time and money — speak to one of our friendly experts today.

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