As a small business owner, you wear a lot of hats. When you sit down to calculate your finances, a Profit and Loss Statement (or P&L statement) can help you get a snapshot of where you stand and where you can make changes in your company.
The Basics of P&L Statements
A profit and loss statement is just that! It shows how much profit you have left over after you have subtracted your profits from expenses. Remember: Profit = Revenue - Cost
Every public company issues a P&L statement quarterly and annually, but it is also recommended for private companies to create such statements for your own analysis. It is your choice how often to create this statement, but most companies opt to create quarterly and annual statements to compare patterns over time. P&L statements are often accompanied by other documents such as balance sheets and cash flow statements.
Two Types of P&L Statements
Periodic P&L
If you're an existing company, this is the statement you will create on a regular basis. This will help you make business decisions and even prepare your business tax return when tax season rolls around.
Pro Forma P&L
This statement is for new businesses to project their profits for future projects. It is typically used when applying for funding. Even as an existing business, you may use this type of P&L Statement if you apply for financing or funding for company equipment or specific projects. This allows the lender to understand where your current finances are and how the loan will affect your company's finances.
How Detailed Should my Statement Be?
We recommend you include all group transactions, such as all travel expenses in one group or equipment purchase in another group. Many software programs can help you organize your expenses and income, too. If you sell products, don't forget to factor in any discounts or product sales you may have had! With some software programs, you may have to add cash transactions separately, so be sure to hold on to any receipts and adjust accordingly. Don't be surprised if you have more list items under expenses than under income! The ultimate goal is to see where your money is flowing so you can adjust as needed whether that means cutting expenses or raising prices.
Example of Profit Loss Statement
This link provides some examples of Profit & Loss Statements: Hands on Banking
Conclusion
Your company's Profit and Loss Statement is a wonderful way to get a bird's eye view of your company profits and works well in conjunction with other financial statements. If you have additional questions about setting up your P&L Statement, set up an appointment HERE with Adam today!
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Disclaimer: The views presented in this post are meant as educational resources and should not be taken as direct advice for your personal finances or small business. Should you have questions regarding a post relating to your specific finances, please contact us at info@practicalaccountingva.com.
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