What is a profit and loss statement and how does it help your business? Understanding numbers is essential to analyzing business performance and informs how you manage your small business. One of the most important financial statements for your business is the profit and loss statement, also known as an income statement.
The U.S Small Business Administration (SBA) provides the following profit and loss statement definition:
“A profit and loss statement, also referred to as an income statement, enables you to project sales and expenses and typically covers a period of a few months to a year.”
In other words, a profit and loss statement provides information about how money flows in and out of your business. By making a profit and loss statement for your small business, you’ll be able to determine if your business is:
- Making a profit
- Breaking even
- Making losses
The period that your profit and loss statement covers depends entirely on your business needs. You should choose the best time frame that will enable you to review your operational costs. Your profit and loss statement can either account for monthly, quarterly or annual periods. You may need a profit and loss statement to demonstrate your small business’s viability to a third party – for instance, when applying for a loan. In this instance, you’ll need to show a year-to-date statement and, typically, you’ll also be required to supply a statement for the previous year.
In this article, we will discuss how to make a profit and loss statement with the following easy steps:
- Choose your profit and loss form
- Organize your records
- Choose your time period
- Determine your revenue
- Identify your expenses
- Work out your profit number
Additional uses of a profit and loss statement
The profit and loss statement definition states its main purpose, which is to forecast sales and expenses. However, there are many advantages and uses of a profit and loss statement for a small business, including:
- Tax calculations – Regularly updating your profit and loss statements will help to get your small business ready for tax season. You’ll be organized with some of the financial information required to file your taxes. If your small business has earned a net profit, this number will be used to help calculate how much tax you owe. But if your business makes a loss, there will normally be no income tax to pay because losses are tax deductible.
- Business performance – A profit and loss statement is a key document that potential buyers will examine when buying a business. If you plan to sell your small business in the future, a profit and loss statement will reveal how your business has been performing. This statement could help you obtain a more favorable business valuation and will also strengthen your negotiating position in relation to the final price. A profit and loss statement can also be used to reassure potential investors and clients that you’re operating a viable business.
- Loan applications – If you want to apply for a loan for your small business, the loan provider will need to examine your profit and loss statement to assess the risks involved in providing the loan.
Analyze and predict trends – Collating monthly figures from your profit and loss statement and formulating a visual aid, like a chart will help you to identify patterns in your business. You’ll be able to recognize fluctuations in your income and expenses and investigate the reasons behind the changes. This analysis will also help you to forecast your finances and balance your business budget. Read this article for the best tips to balance your budget in 2018.
- Review cost of goods – Your profit and loss statement will show whether you’re recovering the cost of goods and if so, the amount of profit you’re making. Your profit and loss statement will help you to establish whether you’re charging for all the direct costs of completing your work.
Improve business – A review of your profit and loss statement will help you to spot ways to cut down on expenses. The information from your profit and loss statement will also assist you in making decisions about how to reinvest profits to grow and improve your business.
How to make a profit and loss statement
The first decision you’ll need to make when preparing a profit and loss statement for your small business is whether you’ll use accounting software, such as QuickBooks, or take a manual approach by using spreadsheets, for example, MS Excel. Creating a manual profit and loss form is simple, but the process could get complicated as the number of entries grows and you need to make comparisons. The advantage of using accounting software for your profit and loss statement is that it does the ‘heavy lifting’ for you and there’s no need to learn complicated formulas. You’ll also benefit from using accounting software because it integrates with other tools, like Deputy.
Your profit and loss statement will only be effective if accurate information is entered. Business transaction records should be filed in an organized way to input the data into your profit and loss account. If you’re having difficulty arranging your financial records, you could consider using the services of a bookkeeper or, alternatively, reliable accounting software will also help to get your records in order.
You’ll need to decide which time period will be accounted for in your profit and loss statement. The time period you select will be determined by your goals and also the financial records you have available.
You should include your revenue on the profit and loss statement at the point that you have provided the service or goods to your customer. For the purposes of a profit and loss statement, revenue doesn’t depend on whether you’ve received payment. So, as long as you’ve delivered a service or provided a product, you record this transaction as revenue even though an invoice may still be outstanding. If you do receive payment for your goods and services immediately, receipts and revenue are classified as the same for your profit and loss statement.
Your revenue is all the money your business makes from different activities, including:
Proceeds from the sale of all services and goods (operating revenue).
Income received from sources that aren’t related to your business’s typical activities (non-operating revenue), for example, rent from subletting business space.
Gains received as a result of the sale of a long-term asset, such as a property or ad-hoc gains, for example, proceeds from a lawsuit. The gains that are included in your profit and loss statement aren’t the gross proceeds from the sale. The gains recording should be the amount by which the proceeds exceed the value of the asset on your business’s books.
You would typically record an expense on your profit and loss statement when you have a responsibility for payment. For instance, employee pay is recorded as an expense even if your business has not made payment.
There are instances when some expenses are matched to revenue on your profit and loss statement. An example is if you pay your employees commission, the commission owed will be reported as an expense when you record the revenue from the sale.
Some payments aren’t classified as expenses for the purposes of your profit and loss statement. For example, the principal on a loan is regarded as an outlay of cash. To ensure that you list the correct expenses, you can separate them into different categories, including:
- Operating expenses – These expenses are the costs to your business when undertaking normal business activities, but it doesn’t include the costs of goods sold. Operating expenses include rent, insurance, and utilities.
- Non-operating expenses – You incur non-operating expenses when you spend money on things that are not normal business operations. This can include one-time costs or interest on borrowed money.
- Losses – For the purposes of your profit and loss statement, losses are an amount where the proceeds are less than the asset’s value, for instance, lawsuit damages.
You can find out how much profit you made by calculating your revenue minus your expenses. To go further, you can also work out your net income (what you’ll make after tax). If you need to save time on making calculations and want to ensure that your figures are accurate, think about using accounting software.
Profit and loss template
Making a profit and loss statement can be done in six steps. However, you’ll need to be precise with the details you include in revenue and expenses to get a true picture of how your business is performing.
The SBA has provided a template of a profit and loss statements that you could use for your small business. This profit and loss form gives you a solid basis to start recording and reconciling your revenue and expenses. However, if you use accounting software, your profit and loss statement will be done automatically, according to the information that you have provided.
A profit and loss statement shows you how your business has been performing and is a necessary part of prudent financial reporting. There are many uses for a profit and loss statement. Perhaps the main benefit of a profit and loss statement for small business is that it helps to determine the financial health of your company and helps you to take corrective action if necessary.
Benefit your bottom line
Whether you decide to make your profit and loss statement on a manual form or using accounting software, your business will benefit from knowing exactly how much you receive and spend and the effects on your profits. If you’re having difficulty making your profit and loss statement, contact a certified public accountant for advice.
Payroll is a standard operating expense that needs to be included on your profit and loss account. Take the hassle out of working out your payroll costs for a given time-frame by integrating Deputy with your accounting software. Deputy automatically calculates the costs of shifts, so you’ll have accurate numbers in relation to your payroll operating expense every time. Deputy also has a function to help you to save money on staff costs by allowing you to enter your sales budget against your schedule. Book a personalized demo below to find out how Deputy can help you to make accurate profit and loss statements and maximize your revenue in relation to staff costs.
The information contained in this article is general in nature and you should consider whether the information is appropriate to your needs. Legal and other matters referred to in this article are of a general nature only and are based on Deputy's interpretation of laws existing at the time and should not be relied on in place of professional advice. Deputy is not responsible for the content of any site owned by a third party that may be linked to this article and no warranty is made by us concerning the suitability, accuracy or timeliness of the content of any site that may be linked to this article. Deputy disclaims all liability (except for any liability which by law cannot be excluded) for any error, inaccuracy, or omission from the information contained in this article and any loss or damage suffered by any person directly or indirectly through relying on this information.