What Is a Profit and Loss Statement?
A profit and loss (P&L) statement summarizes revenue and expenses over a specific period. It’s also called a “P&L statement,” “income statement” or “income and expense statement.”
A P&L statement can provide valuable insight into a company’s financial health. Creating one for your business can help you monitor profitability, make decisions about future investments and prepare to apply for funding.
- A profit and loss statement provides an overview of a company’s sales, expenses and net income over a period of time — usually monthly, quarterly or annually.
- A P&L statement can inform business decisions by helping business owners understand where their money is coming and going, and how the current state of operations is impacting their bottom line.
- Many lenders require businesses to provide a long list of financial documents, including a profit and loss statement, when they apply for small business financing.
What is a profit and loss statement?
A profit and loss statement is an important financial document that tracks a business’s revenue and expenses and shows whether or not it was profitable — and by how much — during a specific period of time. While larger companies may choose to complete P&L statements on a quarterly or annual basis, small businesses may want to calculate profit and loss statements monthly.
The profit and loss statement shows important information that, when analyzed alongside balance sheets and cash flow statements, can make business decisions easier. For instance, a P&L statement can help you:
- Identify seasonal, monthly, quarterly and annual trends in sales
- Calculate which products or services are most profitable
- Track where you’re spending money on expenses
- Identify areas for management improvement
- Evaluate the success of your business plan
- Prepare for tax season
What are P&L statements used for?
The main purpose of a profit and loss statement is to tell you if your company is making or losing money over a specific period of time, typically monthly, quarterly or annually. You can use profit and loss statements to manage small business finances and make strategic decisions about your business.
In addition to keeping tabs on financial health, a profit and loss statement is needed to secure funding, like business loans and lines of credit. Many lenders, including the Small Business Administration (SBA), require applicants to submit a P&L statement during the loan application process.
Types of profit and loss statements
There are two accounting methods used for P&L statements: the cash accounting method and the accrual method.
Cash accounting method
With the cash accounting method, you record sales and expenses when you actually receive or spend money. For example, if you give customers 90 days to pay, you don’t record sales until you receive payment from them.
This easy accounting method may be adequate for simple businesses, like food trucks or housekeeping services, that don’t usually have lengthy timing differences between when transactions occur and when they are paid for.
Accrual method
Many companies use the accrual method. Under this method, you record revenue and expenses when the business transaction happens — even if the money hasn’t been paid or received yet. Balance sheet accounts like accounts payable and accounts receivable are used to keep track of what you owe and are owed.
The accrual method is typically used by businesses that are required to follow Generally Accepted Accounting Principles (GAAP), as well as businesses that have inventory. Because the accrual method can be more complicated, it typically requires the use of double-entry accounting software or a bookkeeping service.
Components of a P&L statement
A profit and loss statement can give you valuable insight into your business and its profitability, but to create a P&L statement, you’ll need to understand the key metrics that go into this important document.
Though these metrics can vary from company to company, they generally include the following:
- Gross revenue: Money received from selling your goods or services.
- Discounts and returns: Money lost to product returns and discounts.
- Net revenue: Gross revenue minus any discounts and returns.
- Cost of goods sold (COGS): Cost of producing goods and services, including materials, labor and any other costs involved in creating what you’re selling.
- Gross profit: Net revenue minus COGS. This tells you if you’re selling products for more than they cost to make. In a profitable business, it should always be a positive number.
- Pretax income: Gross profit minus operating and non-operating expenses, not including tax.
- Operating income: Gross profit minus operating expenses. It’s also referred to as operating profit.
- Operating expenses: Management salaries, utilities, rent, insurance, supplies and other costs that are needed to run the business but not directly tied to producing the product or service you’re selling. These expenses are sometimes called “fixed costs” or “overhead.”
- Non-operating expenses: Any business expenses that are not related to your core business operations, such as interest expenses, litigation costs and losses on the sale of business assets.
- Net profit (or loss): Pretax income minus income taxes. This is also called the “bottom line.”
Net profits are a key metric in your P&L statement: A positive number reflects profit, and a negative number indicates a loss. Losses occur when slow or declining sales are not sufficient to cover operating expenses, or expenses escalate faster than sales.
A net loss is a sign of trouble but doesn’t tell the full story. To find out why your business wasn’t profitable, you’ll have to examine individual expense categories. Comparing performance trends over time, like quarter to quarter, may help you pinpoint the areas causing problems.
How to make a profit and loss statement
The first step in creating a P&L statement is to gather data on sales and expenses. Important information you’ll need to pull together includes:
For revenue:
- Cash register or POS terminal printout
- Merchant account summary of credit card sales
- Reports from other payment processors, like Stripe, Venmo, Paypal or Zelle
- Copies of invoices you sent to customers
For expenses:
- Bills from suppliers
- Statements for credit cards you’re using for business expenses
- Payroll processing reports, if you have employees
Next it’s time to put your data into the right format. You can purchase accounting software or create your own P&L statement in a spreadsheet. Accounting software is generally the most efficient approach because after you input your data, the program automatically generates the P&L statement and other financial reports.
But if you’re running a simple business or creating a forecast of future profits based on assumptions, called a pro forma income statement, a spreadsheet may be the easiest tool for the job. You can build your own P&L spreadsheet or download a free template.
While the easiest method is using accounting software, you can also create a P&L sheet using Excel, Google Sheets or an existing template.
- SCORE: This template uses Excel and focuses on a one-year projection, with spaces for local, state and federal taxes.
- IRS Form 1040: If you primarily need P&L information for taxes, you can fill it in directly to the IRS form.
- Smartsheet: If you need a barebones template for a short, visually appealing overview, Smartsheet’s template can be filled out directly in your browser.
- DC.gov: Optimized for new businesses, this Excel template uses monthly projections for year one, quarterly projections for year two and yearly projections through year five.
Other financial tracking forms
In addition to the P&L statement, other financial reports that will help you fully understand your business’s health include:
- Cash flow statement: If you use the accrual accounting method, you’ll need a cash flow statement to tell you what’s causing cash to flow in and out of your bank account. Cash flow statements generally cover all sources of cash, including cash generated through operating activities, investing activities and financing activities.
- Balance sheet: This report keeps track of your assets, liabilities and equity. Assets are things you own like real estate, machinery and patents, while liabilities are debts you owe, such as taxes, leases and loans. By subtracting liabilities from assets, you can assess the amount of equity — or ownership stake — you have after all debts are paid.
- Comparison to budget: Creating a business budget and comparing it to your real financial statements is a great way to analyze where you’re succeeding and where you can improve. Adjust your budget regularly to make sure it reflects your business reality.
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