A Profit and Loss Statement (P&L), also known as an income statement or earnings statement, is one of the most critical financial documents your business will produce. It's a comprehensive summary of your company's revenues, costs, and expenses over a specific period—typically monthly, quarterly, or annually. For online sellers, understanding your P&L Statement is absolutely essential to making informed business decisions and tracking whether your business is actually profitable.
What is a Profit & Loss Statement?
A Profit and Loss Statement answers the fundamental question every business owner asks: "Am I making money?" Unlike your bank account balance, which can be misleading due to timing differences, your P&L Statement shows the true financial performance of your business using proper accounting principles.
The P&L Statement shows the true financial performance of your using proper accounting principles. Whether you sell on Amazon, Shopify, Etsy, eBay, or Walmart, your P&L Statement reveals whether your business model works and how profitable you really are.
Core Purpose of P&L Statement
- Shows Profitability = Reveals if your revenue exceeds your expenses
- Tracks Performance = Compares results across time periods and identifies trends
- Guides Decisions = Helps you identify which products/channels are profitable
- Tax Reporting = Provides the foundation for your tax return calculations
- Attracts Investors = Shows lenders and investors if your business is viable
The Three Core Sections of a P&L Statement
Every Profit and Loss Statement consists of three main sections that flow together to calculate your net profit or loss. Let's break down each section with real examples for online sellers.
| Section | Definition | Example for Sellers |
|---|---|---|
| Revenue (Top Line) | Total money earned from selling products/services before any expenses | Amazon sales: $50,000; Shopify sales: $30,000; Total: $80,000 |
| Cost of Goods Sold (COGS) | Direct costs to produce goods (product cost, packaging, shipping to warehouse) | Product cost: $20,000; Shipping: $5,000; Prep fees: $2,000; Total: $27,000 |
| Gross Profit | Revenue minus COGS (Revenue - COGS) | $80,000 - $27,000 = $53,000 Gross Profit |
| Operating Expenses | Costs to run the business (marketing, software, labor, rent, etc.) | Advertising: $8,000; Software: $1,500; Labor: $3,000; Total: $12,500 |
| Operating Income | Gross Profit minus Operating Expenses | $53,000 - $12,500 = $40,500 Operating Income |
| Other Income/Expenses | Non-business items (interest income, gains/losses, one-time items) | Bank interest: $200; Equipment sale loss: -$500; Total: -$300 |
| Net Profit (Bottom Line) | Final profit or loss after all expenses and income | $40,500 - $300 = $40,200 Net Profit |
Breaking Down Each Section in Detail
1. Revenue (Top Line)
Revenue is the total money your business earns from selling products or services. For online sellers, this includes all sales across all channels—Amazon FBA, Shopify, Etsy, eBay, Walmart, and direct sales. However, remember to not include:
- Sales returns and refunds (subtract these from revenue)
- Discounts you gave customers (should reduce revenue)
- Shipping costs customers paid (often flows to COGS)
Use our Profit Calculator to quickly calculate total revenue across multiple platforms.
2. Cost of Goods Sold (COGS)
COGS includes only the direct costs to produce the goods you sold. This is crucial because it's different from all other business expenses. COGS includes:
- Product cost (what you paid suppliers)
- Shipping from supplier to your warehouse
- Customs and import duties
- Amazon prep fees and FBA shipping fees
- Packaging materials and boxes
- Labeling costs
COGS does NOT include marketing, software, office rent, or employee salaries. Learn more about calculating COGS accurately with our COGS Calculation Guide and COGS Calculator.
3. Gross Profit
This is simply Revenue minus COGS. Gross Profit shows how much money you have left after paying for the goods themselves, but before paying operating expenses like marketing and staffing. A healthy gross profit margin is typically 40-60% for ecommerce sellers, though this varies by category.
4. Operating Expenses
These are all the costs to operate your business beyond producing the goods. Operating expenses include:
- Marketing & Advertising: Amazon ads, Facebook ads, Google ads, influencer partnerships
- Software & Tools: Accounting software, inventory management, email marketing
- Marketplace Fees: Amazon referral fees, Shopify subscription, Etsy shop fees
- Fulfillment: Shipping to customers (if not in COGS), storage fees
- Labor: Employee salaries, contractor fees, accounting services
- Overhead: Office rent, utilities, internet, phone
- Professional Services: Accounting, legal, consulting
5. Operating Income
This is Gross Profit minus Operating Expenses. Operating Income shows how profitable your core business activities are, before considering taxes or other non-business items.
6. Net Profit (Bottom Line)
This is the final profit or loss after everything. It accounts for all income, all expenses, and any gains or losses. This is the number that matters most for your taxes and understanding true profitability.
Increasing Revenue
The most direct way to improve your P&L is to increase sales, but volume growth alone doesn't guarantee profitability
Reducing COGS
Negotiate better supplier prices, reduce shipping costs, and optimize packaging to improve gross profit margins
Controlling Expenses
Monitor operating expenses carefully—unnecessary spending directly reduces net profit dollar-for-dollar
How to Read Your P&L Statement Like a Pro
Beyond just looking at the bottom line, you should analyze your P&L Statement to identify trends and opportunities.
Key Metrics to Calculate from Your P&L
Gross Profit Margin
Formula: (Gross Profit ÷ Revenue) × 100
This shows what percentage of every sales dollar remains after paying for products. If your margin is declining, your COGS is increasing relative to sales.
Operating Profit Margin
Formula: (Operating Income ÷ Revenue) × 100
This shows what percentage of sales becomes profit after all operating expenses. A healthy operating margin is 15-25% for most ecommerce businesses.
Net Profit Margin
Formula: (Net Profit ÷ Revenue) × 100
This is your true profitability rate. If you make $100 in sales and have a 20% net profit margin, you keep $20 as profit. Use our Profit Calculator for quick calculations.
Common P&L Mistakes Online Sellers Make
Understanding common pitfalls helps you create accurate P&L Statements:
- Including taxes in COGS - Taxes are separate expenses, not product costs
- Forgetting marketplace fees - Amazon, Shopify, and Etsy fees are operating expenses
- Ignoring unsold inventory - Unsold stock isn't immediately an expense
- Mixing personal and business expenses - Only include legitimate business costs
- Using cash accounting instead of accrual - P&L uses accrual basis, not cash basis
Profit & Loss Statement: Key Facts
Typical healthy gross profit margin for ecommerce businesses selling products
Average net profit margin for successful online sellers after all expenses
Recommended frequency for reviewing your P&L to catch issues early
Revenue, Expenses, and Profit - the core components of every P&L Statement
Frequently Asked Questions About P&L Statements
A P&L Statement shows your profit or loss over a specific period (profitability). A balance sheet shows your financial position at a specific point in time (assets, liabilities, equity). P&L is like a movie showing performance over time, while a balance sheet is a snapshot at one moment.
You should review your P&L at least monthly. Many successful sellers review it weekly to quickly catch trends and problems. Monthly reviews allow you to make adjustments before issues compound, especially important for seasonal businesses.
Amazon referral fees (selling fees) are operating expenses, not COGS. However, Amazon FBA shipping fees and fulfillment fees can be included in COGS since they're directly tied to the products sold. Many sellers track them separately for better visibility.
A loss means your expenses exceeded your revenue in that period. This is common for new businesses in their first year or two. Analyze your P&L to identify whether the loss is due to low revenue, high COGS, or excessive operating expenses, then adjust your strategy accordingly.
Yes! Your P&L Statement is the foundation for your business tax return. The net profit from your P&L flows directly to your tax return. This is why maintaining accurate records and proper P&L statements is crucial for filing taxes correctly.
You can improve profitability by: (1) Increasing revenue through better marketing and sales, (2) Reducing COGS by negotiating better supplier prices or improving shipping efficiency, (3) Cutting unnecessary operating expenses without hurting growth, and (4) Increasing profit margins by raising prices strategically.
Conclusion: Your P&L is Your Business Compass
Your Profit & Loss Statement is far more than just a financial document—it's your business's report card and your strategic compass. By understanding how to read, interpret, and use your P&L Statement, you gain clear insight into whether your business is truly profitable and where to focus your efforts for improvement.
Review your P&L Statement monthly, understand the relationships between revenue, costs, and profit, and use it to guide your business decisions. Download our P&L Template to get started tracking your numbers accurately.
Action Items
- Download and complete our P&L Template for your business
- Calculate your gross profit margin and compare it to industry standards
- Identify your three largest operating expenses and evaluate if they're necessary
- Use our Profit Calculator to analyze your numbers
- Set up monthly P&L reviews to track progress toward your profit goals
- Review our COGS Guide to ensure accurate cost tracking