What is an Income Statement (P&L)?

An income statement, also called a profit and loss statement (P&L), shows your business revenue, expenses, and net income over a specific period. While a balance sheet captures a snapshot in time, the income statement tells the story of how your business performed over months or years.

Key Components of an Income Statement

A standard income statement includes:

• Revenue (Sales): Total income from your core business activities
• Cost of Goods Sold (COGS): Direct costs to produce goods or services
• Gross Profit: Revenue minus COGS
• Operating Expenses: Rent, salaries, utilities, marketing, and other business costs
• Operating Income (EBIT): Gross profit minus operating expenses
• Interest and Taxes: Financing costs and tax obligations
• Net Income: The bottom line — your actual profit or loss

Reading the Income Statement

The income statement flows from top to bottom, starting with revenue and subtracting various expenses to arrive at net income. Each subtraction reveals a different measure of profitability:

• Gross margin: (Gross Profit ÷ Revenue) shows production efficiency
• Operating margin: (Operating Income ÷ Revenue) shows operational efficiency
• Net margin: (Net Income ÷ Revenue) shows overall profitability

Why Lenders Review Income Statements

When evaluating your loan application, lenders use the P&L to assess:

• Revenue trends — is your business growing, stable, or declining?
• Profitability — can you generate enough income to repay loans?
• Expense management — are costs under control?
• Cash flow potential — what is available for debt service?

Income Statement vs. Cash Flow

The income statement shows profitability on an accrual basis — revenue is recorded when earned, not when cash is received. This means a profitable business can still face cash flow problems.

Lenders often request both income statements and cash flow statements to understand your complete financial picture.

Preparing for a Loan Application

Most lenders request income statements for the past two to three years, plus year-to-date figures. Having these documents prepared and organized speeds up the application process.