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A profit and loss (P&L) statement, also known as an income statement, is essential to every business in every industry. It provides a detailed view of a business’s financial performance during a period, such as a month, quarter, or year. A P&L statement demonstrates a small business’s ability to break even and profit. It also helps business owners and decision-makers identify areas that need improvement. If you are not familiar with P&L statements, this Balboa Capital blog post has the information you need. Think of it as a profit and loss statement guide.
An essential part of your business plan.
Your P&L statement is perhaps the most crucial part of your business plan. It is the best way to examine your revenues, costs, and expenses over a period to see your small business’s financial progress. Your P&L statement provides a snapshot of how cash flows into and out of your business. In addition, you can use your P&L statement to help predict future income and identify expenses that can be reduced or eliminated.
Preparing your P&L statement.
Getting your profit and loss statement started is relatively simple, so long as you have all the necessary financial information readily available. But, first, you must understand the basic formula for calculating your business’s profit:
Profit = Revenues – Expenses
Your total revenue, which should be placed on the top line of your P&L statement, represents the total amount of money you generate from sales. It is essential to keep your sales high, as that is the number that covers your expenses and keeps your business profitable. Your total revenue subtracts the costs of running your business to show your gross profit and gross profit margin.
Next, add your business expenses below your gross profit margin. These can be entered as separate line items, such as accounting fees, marketing fees, insurance, employee payroll, etc. Finally, subtract your total expenses from your gross profit to get your net profit and your net profit margin. That’s it – your profit and loss statement is complete! Here is an example of a typical P&L statement:
|(Less) Cost of Goods Sold||$195,000|
|(Less) Business Expenses|
|Total Business Expenses||$173,500|
|Net Business Profit||$331,500|
How to use your P&L statement.
When reviewing your P&L statement, you might decide to reduce some costs to maintain higher profits for your business. Your P&L statement helps answer questions such as “how can I cut down unnecessary spending?” or “how can I increase our net profit?”
Additionally, you might want to use your profits to increase certain expenses. For example, if your marketing campaign is helping your business generate revenue, you might increase your budget or look at new or complementary marketing strategies. Moving more dollars into a proven marketing campaign can increase sales, as more potential customers will see your products or services.
Maintain accurate books.
Keeping your accounting books updated weekly, monthly, and quarterly will keep your business organized and your financials up to date. Three standard accounting reports include balance sheets, P&L, and retained earnings.
These are essential to keeping your business’s finances in order, enabling you to make sound business decisions that can improve your business and maximize your profits. Bookkeeping can be managed by an on-staff accountant or be allocated to an external accounting professional.
A profit and loss statement shows how well your business performed during a specific time frame and is a significant determinant of success. Therefore, ensure you maintain an accurate P&L statement to calculate profit and make the best decisions relating to your small business’s financial situation and growth.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.