Whether you are starting a small scale business or a large corporation, it is always important that you learn the nitty-gritty of some financial statements. While operating your business, one essential statement that will help you achieve an effective decision-making process is a profit and loss statement, also known as income statement.
A profit and loss statement, in its simplest definition, refers to a financial document that reports a company’s total revenues, costs, expenses, and net income over a specific period of time. Usually, a well-written profit and loss statement can help determine whether a company or business is making a profit or a loss. With such information hand forth, the management is made to make rational decisions that can either improve the profits or prevent future losses.
When should one prepare a profit and loss statement?
A profit and loss statement is a crucial financial tool that each business should endeavor to have. While some may ask for the appropriate time to have one, it’s often recommended that you prepare it either periodically at given time intervals or as a pro forma.
Periodic profit and loss statement (established businesses)
As a business person, you are always expected to prepare a profit and loss statement periodically, let’s say every month, quarter, or year. A periodic review of profit and loss statements not only helps in making rational decisions but also helps in filling your tax returns. On frequent occasions, you will use the information from the statement to calculate your tax returns as per your net income.
When starting up a business
When running a business startup, you may want to create a profit and loss accounts for varied reasons. First, a profit and loss statement can help you apply more funding for your business helping you to grow and develop. Secondly, the statement can also help you project future success.
How to prepare and structure a profit and loss statement
Whether you are preparing a profit and loss statement for a startup or an established business, the structure will always remain the same. In each row, you should include your monthly or quarterly amounts then total them per year. The following is a step by step guidance of creating a P&L statement:
Step 1: List all the net income/revenue
First and foremost, you need to itemize all the sources of income/revenue for your business. Usually, these totals are titled ‘sales.’ If you like, you can break down the income into different subsections for easier review. Other than sales, other sources of income that you may include are dividends, interests earned, incomes from investments, and any other income from an unusual source.
Step 2: Identify business expenses
Here, you need to list down all the expenses incurred while operating the business/company. In some situations, however, you are expected to list the expenses as a percentage of the total sales. Some common examples of expenses include reimbursements, bills, wages, loan repayments, credit card payments, among others.
Step 3: Calculate the differences between the net income and the expenses
After determining your total expenses, you now need to calculate the difference between the total net income (sales) and the total expenses. The resulting about is often known as Earnings Before Interest, Taxes and Depreciation Amortization (EBITDA)
Step 4: calculate tax and other deductions
In this step, you need to identify all the taxes subjected to your business. Then, subtract the taxes from the EBITDA. Alongside with this, you also need to identify any depreciation as well as amortization within the said period and subtract accordingly.
When the resultant amount is positive, it means that the business is making some profits. Otherwise, if the result turns to be negative, then this is an indication that the business is running on a loss. Therefore, the management/owner should make urgent measures to avoid losses.
Free profit and loss statement templates
After a thorough analysis of what’s need to be covered for any business, we have provided an easy to use profit and loss statement templates to make this process easier for you. Through these templates, you can easily monitor your company’s income and expenses at your own convenience. Besides, the templates are easily customizable; hence you can include your business/company’s name and logo in order to bring the professional outlook. As a business person, the simplest way to answer the question of “Is my business making money” lies on your fingertips.
What to include in a profit and loss statement?
Often, the information that is supposed to be included in your statement can either come from your first month, quarter, or year budget. The period will significantly depend on the type of your business or the period by which you are reviewing the P&L statement. Here are some specific items you will include:
- A list of all transactions made with the business credit cards
- A list of all sources of income to your business
- A list of all reductions to sale such as discounts or returns
- Any other transactional documents such as receipts or petty cash.
Conclusion
A profit and loss statement is one of the essential financial documents for any business. They help report the business income, cost, and expenses incurred within a specific period, usually a month, quarter, or a year. Through a profit and loss statement, one is able to understand his/her business financial performance.
