How to Read a Profit and Loss Statement (Income Statement): A Guide for NFP Boards

 




What is a Profit and Loss Statement and What is Trying to Tell Us? 

The Profit and Loss (P&L) Statements (also known as Income Statements) record the totals of income and expenses in a given period. It shows how much money the business made or lost over a period (income minus expenses). 

The P&L assists the board in understanding where the business is profitable and where money is being earned or spent. 

Limitation of a P&L Statement? 

I will continue to come back to this is point throughout the entire blog series, each financial statement only tells part of a story. You need all three financial statements (Profit and Loss, Balance Sheet and Cash Flow Statement) for the complete picture of an organization's finance health. 

The limitation of the P&L are: 

  • Doesn’t show cash flow:  It tells you if a business made a profit, but not whether it actually has cash in the bank. 

  • Ignores assets and debts
     It doesn’t include what the business owns (like equipment) or owes (like loans).

  • One-time snapshot: It only covers a specific time period—past performance, not future potential.

  • Can be manipulated: Businesses can delay expenses or speed up income to make results look better.

  • Accounting rules can distort reality:

    • Depreciation spreads the cost of big purchases over time, even though the cash was spent upfront.

    • Accruals record expenses before money leaves the account.

    • Prepayments show costs that were paid early but don’t count as expenses yet.
       These can make profits look higher or lower than they feel in real life

Close to Home Example of a P&L:

Sometimes the best way to understand financial reports is to relate them to everyday life. 

The below example is of The Jones family which consists of two adults and three children. Their household income comes from two salaries, supplemented by modest dividends from share investments. They have a mortgage on their home and manage regular expenses including school fees, utilities, groceries, and other day-to-day living costs.

Income/Revenue



Salaries (2 adults)

$140,000

Income/Revenue: All the income received by the family activities in a relevant period (e.g. financial year or calendar year)

Dividend Income (shares)

$2,500

Total Income

$142,500





Expenses



Mortgage Payments

$60,000

Expenses: All the expenses that the organisation has paid in the relevant period (e.g. financial year or calendar year)

Schooling (fees, supplies)

$10,000

Groceries

$25,000

Utilities

$4,200

Insurance (home, car, health)

$5,500

Transportation

$7,000

Entertainment & Dining

$4,800

Miscellaneous Living Costs

$3,500

Total Expenses

$120,000





Net Profit (Surplus)

$22,500

Net Profit: Income minus expenses. If income is greater than expenses, this is a surplus (profit). If expenses is greater than income, this is a deficit (loss).


Professional Example

Below is a basic example of a Not-for-profit organization's P&L. 

Income



Grants (Government Funding)

$120,000

Income/Revenue: All the income received by organisation activities in a relevant period (e.g. financial year or calendar year)

Donations & Fundraising

$45,000

Program Fees (e.g. workshops)

$25,000

Other Income (e.g. interest, rent)

$5,000

Total Income

$195,000


Expenses



Staff Wages & On-Costs

$90,000

Expenses: All the expenses that the organisation has paid in the relevant period (e.g. financial year or calendar year)

Program Costs (materials, supplies)

$30,000

Utilities

$7,500

Office & Admin (insurance, phone, printing)

$5,000

Marketing & Events

$8,000

Interest (Loan)

$17,000

Depreciation (equipment, vehicles)

$5,000

Total Expenses

$162,500





Net Profit (Surplus)

$32,500

Net Profit: Income minus expenses. If income is greater than expenses, this is a surplus (profit). If expenses is greater than income, this is a deficit (loss).


Key Takeaway 

The Profit and Loss Statement gives board members a clear view of operational performance: where income is generated, where expenses are spent, and whether the organization is running at a surplus or deficit. 

But remember: the P&L alone is only one chapter. To truly understand the organization’s financial health, it must be read alongside the Balance Sheet and Cash Flow Statement.

Ask yourself: When was the last time our board discussed what our Profit and Loss Statement is really telling us — beyond just whether we made a surplus or deficit?

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