Running a small business means keeping a tight watch on your money—what comes in and what goes out. One key tool for this is the Profit and Loss Statement (P&L), a simple report that shows if your business is making money or not. If terms like “financial statements” seem overwhelming, no worries! This guide is here to make the P&L easy to understand.
What’s a P&L?
Profit and Loss Statement is a financial document that summarizes the revenues, costs, and expenses incurred during a specific period, usually a quarter or year.
Who needs a P&L?
- You, as the business owner. You need a clear and accurate P&L to understand where your business stands financially. It helps you make informed decisions about investments, cost-cutting, and strategic planning.
- Your Accountant and Tax Preparer. Your accountant relies on the P&L to ensure accurate bookkeeping and financial reporting. Come tax season, a precise P&L is invaluable for reporting your business income and for maximizing tax deductions legally and effectively.
- Your Financial Advisor. If you work with a financial advisor, they’ll use your P&L to provide tailored advice on managing your finances, optimizing your cash flow, and planning for future growth.
- Your Potential Investor and Lenders. When you seek additional funding or loans, your P&L statement will be among the first documents requested. It demonstrates your business’s profitability and fiscal responsibility, making you a more attractive investment.
How can you start working on your P&L?
There are three main parts of a P&L: Income, Expense and Profit.
You can begin by collecting all financial records related to your business’s income and expenses. Some of them can be bank statements, merchant sales reports or business expenses receipts. Many accounting software packages can help you keep track of your business expenses and income, and generate a P&L statement automatically.
Income: Where do I get it?
Here are some of the typical financial records that you can obtain the revenue from:
- Sales Receipts
- Invoices
- Bank statements (including Credit Card statements)
- Cash Register Tapes
- Online/Merchant Sales Reports
- Service Contracts and Agreements
Expenses: What are some of them?
- Rent or Mortgage Payments: The cost of leasing or owning your business space.
- Utilities: Electricity, water, internet, and other utilities necessary for your operations.
- Salaries and Wages: Compensation to employees, including benefits.
- Supplies and Materials: Raw materials for product manufacturing or supplies needed for service provision.
- Marketing and Advertising: Costs associated with promoting your business.
- Depreciation and Amortization: Reflecting the reduction in value of your assets over time.
- Insurance: Premiums paid for business insurance.
- Taxes: Various taxes that your business needs to pay.
Industry-specific expenses can significantly affect the cost structure of a business. For example, a manufacturing company will have high costs related to raw materials and production equipment.
Net Profit Calculation: Subtract the expenses from your income.
About the frequency…
You can do this report for a month, 3 months, or even a year. Choose the frequency that suits your business needs the most!
If you need a P&L template…
There are several template providers such as Wise, Smartsheet, and Coefficient.
Regardless, this process can take a lot of work and time. Some people prefer handling the work over to the experts, such as KYKY, for ensured accuracy and great speed.
Overall, the Profit and Loss Statement is a key financial tool for any small business owner to understand your business’s financial performance and oversee its sustainability in the future.
