As a small business owner, you’re always looking to innovate and grow your company. But how do you know if your business operations, sales, and costs are sailing or failing?
A profit and loss statement is a detailed financial report that can show both you and your investors that you’re capable of earning money and where any production and operations costs are going. It demonstrates your ability to generate profit and redirect expenses appropriately, giving you key insights into your company’s financial health.
Our guide will take you through all the steps you need to both create your first profit and loss statement, and get an error-free look at your company’s finances.
So Wait… What Is a Profit and Loss Statement?
A profit and loss statement, otherwise known as a P&L statement, is commonly used as a leading indicator of how a company is performing. Also referred to as an income statement, this document shows exactly what a company’s revenue, expenses, and net income are.
In short, the P&L statement subtracts costs and expenses from total revenue to determine profits or losses.
Other common terms you might see include statement of operations, statement of financial performance, earnings statement, and statement of profit and loss, all referring to the same financial statement.
Why Do I Need a Business Profit and Loss Statement?
Besides the fact that it’s a key indicator of your company’s financial health, it also shows investors or lenders how much money you’ve brought in so far and how much you’ve spent. This allows them to see if your company is profitable and estimate how your business will grow in the future based on its past growth rate.
Not to mention it’s a handy tool when it comes to estimating future budgets and eliminating unnecessary expenses.
Depending on the industry you’re in, a business profit and loss statement can give you a diversity of stats and metrics to keep an eye on.
Leading a construction company? The P&L statement will show you a clear representation of your labor costs. Running a restaurant? Yes, a detailed statement highlights which dishes are selling better and if you’re losing any money on food no one’s ordering.
Who Is Required to Prepare P&L Statements?
Along with the balance sheet and cash flow statement, every public company has to issue a profit and loss statement on a quarterly and annual basis. This financial statement is then filed with the U.S. Securities and Exchange Commission before it can be inspected by any investor or business analyst.
What Is the Difference between Your P&L Statement and a Balance Sheet?
Both of these financial documents have different uses when it comes to tracking cash flow.
A balance sheet paints a more complete picture of your company’s finances. It includes your company’s assets, capital structure, liabilities, and working capital—aspects that the P&L statement doesn’t contain.
Meanwhile, the profit and loss statement is best used to solely analyze your gains and losses over a specific—and often longer—timeframe. This lets you spot red flags like your expenses growing at a faster rate than your revenue. It will also help you see if you have a declining profit in spite of growing sales.
You can also use a P&L statement to assess the feasibility of starting a new project. In fact, a profit and loss statement plays a huge role in the decision-making process as it can help you determine whether you can:
- Expand your business within a specific geographic area
- Explore a new market or launch a side project
- Grow your production capacity
- Hire more employees or contractors
- Stop selling a product with low revenue and high costs
- Invest more in a new department or product line
What Does the Business Profit and Loss Statement Show?
A simple profit and loss statement can be structured with the following line items:
- Cost Of Goods Sold (COGS)
- Net Income
Larger companies will also add earnings they get from dividends and interest income as well as expected taxes, interest payments, and amortization or depreciation on any expenses.
Profit and Loss Statement Template
Here’s a template for a simple profit and loss statement you can edit according to your own income and direct costs. Simply click “Make a copy” and your own editable version will appear in Google Sheets.
How Do You Prepare a Profit and Loss Statement?
Let’s have a look at every single step you need to go through to accurately determine whether your business is profitable or not and get to the bottom line: your net income.
1. Choosing a Time Frame for Your Income Statement
The first step for creating a P&L statement is to decide on the time frame you need to analyze. A weekly, monthly, or quarterly time frame are common choices. That said, think about why you need the statement.
A once-per-quarter statement, for instance, gives you the big picture of your profits and losses during a fiscal quarter. Once a year won’t let you keep track of any fluctuations or spot potential risks.
Decide on a specific period of time and create profit and loss statements regularly. Running these reports at regular intervals lets you easily compare any changes to your business.
Next, add in all the income/revenue your business accrued to the top line of your spreadsheet.
You can separate earnings into distinct categories and revenue streams. Your general ledger and Current Accounts Receivable are two good sources for this information.
3. Cost Of Goods Sold
Complete the second part of the statement by recording how much your raw materials cost, included wages for creating those raw materials, plus any additional manufacturing costs.
Note: Both cash and non-cash receipts are added to the profit and loss statement.
4. Calculating the Gross Profit/Loss
Now that you know how much money you’ve put into your business and what your revenue is, we’ll subtract costs from your total income.
Gross Profit/Loss = Revenue - Cost of Goods Sold
This formula will tell you where your profits stand—or reveal how much money you’re losing on production.
The lengthiest section of this financial statement is likely to include operating expenses like travel fees, payroll, rent and real estate, office supplies, utilities and repair services, insurance, telecommunication, marketing and advertising, shipping fees, etc.
To get your earnings before tax, all you have to do is subtract your expenses from the gross profit we calculated during the previous step.
You might have noticed we haven’t included investment dividends and income from interest in Step 1. This is because they’re added later. At this point, you have your EBITDA (Earnings before interest, taxes, depreciation and amortization) total.
6. Taxes, Amortization, Depreciation, And Interest
Before calculating your final net earnings, add in any expected taxes and amortization or depreciation on any expenses, and interest payments.
7. Obtaining Your Net Earnings
Finally, use this formula to get your net income (also known as net profit):
Net Earnings = EBITDA - (Interest + Depreciation + Taxes + Amortization)
Remember you can always use our own profit and loss statement template to determine your exact revenue and spending.
Wrapping It Up
If you’re still uncertain whether you need a profit and loss statement, the answer is: Yes! Even if you’re a small company that’s just getting started, the document provides valuable insights into the evolution of your business from day one.
Now that you’ve got this aspect of your company’s financial health in check, you’re ready to put together your first profit and loss statement. Need extra help with payroll and reporting expenses? Use Hourly to manage pay periods, calculate overtime, pay your staff, and so much more.