Money. You’re either making it or losing it as a small business owner. It’s impossible to know exactly how your business is doing financially without a way to track your progress. That’s where a profit and loss statement comes in...
What is a Profit and Loss Statement?
A profit and loss statement (also known as a P&L or income statement) gives you a detailed looked at your income and expenses over a specific amount of time. This snapshot of your business’ revenue and expenses is usually generated quarterly, but you can do it as often as you think works best for your operations (i.e., monthly, quarterly, annually).
How to Create a P&L Statement
You can generate a profit and loss statement through the accounting software for your small business, or develop one that’s customized to best meet your business needs. As mentioned earlier, the frequency of your P&L depends on what makes the most sense for your operations—monthly, quarterly, or annually. Every P&L contains two main areas: income earned (revenue) and expenses during a designated time period. Within these two sections, there are various entries that are applicable to your business operations. Every profit and loss statement has these key elements:
Revenue. This item is reported first on a P&L. It reflects your business’ operating revenue, as well as any income from non-operating sources like interest. Revenue is typically reported when it’s earned at the time of sale, even if the payments have not yet been received. Using a cash method, revenue is recorded when received.
Cost of Goods Sold. If your business sells goods, you must figure the cost of goods sold (COGS) into your P&L. This is the cost of inventory or materials used to make your products that’s subtracted from sales to determine gross profits. For instance, if you have a $10 item in inventory that sells for $50, you have $50 in revenue after subtracting the $10 in COGS, you’d report $40 in gross profit from that item.
Expenses. This section includes any expenses you incurred to run your business, such as advertising costs, payroll, office supplies, or vendor payments. This area can get a bit more complicated as some expenses require you to take asset depreciation into account for some of your purchases (i.e., office equipment like computers). This area also includes non-operating expenses like interest and taxes.
Gross Profit. The gross profit for your small business is the difference between your revenue and cost of goods sold (COGS). If your business sells services versus goods (you have no inventory), then your gross profit and revenue are the same amount.
Net Profit or Loss. Your business’s net profit or loss on your profit and loss statement is calculated after any taxes and subtracted from your pretax income. If exact numbers aren’t available when your P&L is generated, your net profit or loss is usually equal to your earnings before interest, taxes, depreciation, and amortization (EBITDA).
Other Essential Financial Statements for Your Small Business
In addition to your profit and loss statement, there are two other financial statements that are critical for running a business of any size: 1) cash flow statement and 2) balance sheet. Your cash flow statement shows how money is moved in and out of your business. It acts as a link between your P&L statement and your balance sheet. The balance sheet captures the current financial standing of your business. It includes your assets, liabilities, and net worth or equity to account for both internal assets and outgoing funds. Balance sheets are only part of the financial tracking process and represent a short and/or given time period.
P&L Help, and So Much More
Creating a P&L that works for your business can be an overwhelming and time-consuming task—make it easier on yourself with help from Sidekick Accounting Services. Our professional staff can help you take a start-to-finish approach to profit and loss statements that works best for your business. We can also help you with many other facets of finance and accounting, such as tax services.
Contact us at 414-310-7689 or firstname.lastname@example.org.