A Profit & Loss statement (P&L or income statement) summarizes revenues, costs, and expenses over a period, showing net profit or loss. It is one of the three core financial statements and the primary document lenders use to assess profitability.
The P&L flows from top to bottom: Revenue (total sales) → minus Cost of Goods Sold (COGS) → equals Gross Profit → minus Operating Expenses (SG&A, rent, salaries, marketing) → equals Operating Income (EBIT) → plus/minus Other Income/Expense (interest income, interest expense) → equals Pre-Tax Income → minus Income Tax Expense → equals Net Income. The P&L answers the question 'How much did the business earn or lose over a defined period?' Unlike the balance sheet (a snapshot at a point in time), the P&L covers a period — monthly, quarterly, or annually. Most lenders require 2-3 years of annual P&Ls plus a current year-to-date statement for loan applications. Key P&L ratios for lenders: Gross Margin (Gross Profit / Revenue) — shows pricing power and COGS control; Operating Margin (Operating Income / Revenue) — measures operational efficiency; Net Margin (Net Income / Revenue) — overall profitability. EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization) is derived from the P&L and is the standard cash-flow proxy in commercial lending. The P&L can be prepared on cash basis (record income/expenses when cash changes hands) or accrual basis (record when earned/incurred). Lenders generally prefer accrual-basis statements for accurate matching of revenues and expenses. Tax returns reflect the tax-basis P&L, which may differ from GAAP statements due to accelerated depreciation, owner compensation adjustments, and other differences.
The P&L shows revenues and expenses on an accrual basis — revenue is recorded when earned, expenses when incurred, regardless of when cash changes hands. The cash flow statement shows actual cash movements. A business can show net income on the P&L but burn cash if customers don't pay (growing AR) or if the business is investing heavily in assets. Following both statements is essential.
Multiple years reveal trends — a single year could be an outlier. Lenders want to see consistent (or improving) revenue, stable or expanding margins, and recurring profitability. A business with one strong year after two weak years will be scrutinized more than one with three consistent years. Year-over-year trends also help assess seasonality and business stability.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a P&L-derived proxy for operating cash generation. It strips out financing costs (interest), tax treatment (varies by structure), and non-cash charges (depreciation, amortization) to give a cleaner picture of underlying cash generation from operations. DSCR = EBITDA (adjusted) / Total Debt Service is the core loan serviceability metric.
Yes — owner's salary (W-2) or owner draws (for pass-through entities) appear as operating expenses. Lenders typically 'add back' excess owner compensation above market rate when calculating normalized EBITDA. An owner paying themselves $500K in a business where a manager replacement would cost $150K — lenders add back $350K to get a normalized earnings picture.