A Profit & Loss (P&L) Statement, also known as an Income Statement, is one of the primary financial documents you need to understand your business's finances. Let’s dig a little deeper into this document and why it’s important for your business.
What is a P&L Statement?
A P&L statement details your revenue and expenses for a given period, generally a year or a quarter. The result is your net income (or loss), also known as “the bottom line.” This amount is figured by subtracting total costs and expenses from total income and revenue.
What is on a P&L Statement?
Here are the main categories you may find on a P&L statement.
Revenue: income from the sales of products or services
Cost of Goods Sold: the cost of inventory and materials used to create your product
Gross Profit: the difference between revenue and the costs of goods sold
Operating Expenses: expenses you incur while running your business including payroll, supplies, rent, utilities, advertising, insurance, etc.
Operating Profit: the difference between gross profit and operating expenses.
Interest Expense: the amount of interest paid
Tax Expense: the amount of taxes paid including federal, state, and city (not including property tax)
Net Income or Loss: the difference between your revenue and expenses
Why Do I Need a P&L Statement?
P&L statements are a good way to see the overall financial health of your business. You are able to see where you are spending money, how much money you are making, and where you can cut costs to maximize your profitability. Here are some of the benefits of regularly generating a P&L statement:
Make Educated Decisions
The real value from P&L statements is when you compare them to previous periods to identify positive or negative trends. This will give you insight into how your revenue, expenses, and profitability have changed. Having an understanding of your P&L statement will guide you in making key decisions for your business.
Be Prepared for Tax Time
Tax time is a lot easier when you have generated a P&L statement for the year since most of the information on the statement is needed for your tax return. If you file a Schedule C for your business, then you are essentially recreating a Profit and Loss statement on your tax return. However, it’s important to note that there may be differences between the two due to tax laws on eligible business deductions.
Help Secure Business Loans and Financing
When applying for business loans, many lenders request P&L statements. It gives those outside the company a good idea of how your business is performing and your ability to pay them back.
How to Create a P&L Statement?
The P&L statement will look different for every company. The first thing you need to know is whether your business uses the cash or accrual accounting method. The accounting method determines how you report your income and expenses on the P&L statement.
There are many variables when creating a P&L statement since every business is vastly different. However, the first, very important step for all businesses is to gather any documents and information you have about revenue and expenses. Once you collect all the information you need for your P&L, you can get started on creating one.
Here are the basic steps for creating a P&L statement:
Calculate revenue
Calculate COGS
Subtract COGs from revenue to determine gross profit
Calculate operating expenses
Subtract operating expenses from gross profit to determine operating profit
Calculate interest and tax expenses
Subtract interest and tax expenses from operating profit to get net income (or loss)
Please note this is a very simplified version and does not take into account many factors that may be applicable to your business such as depreciation and amortization.
Many accounting software, such as QuickBooks, have the ability to generate a P&L statement based on the information entered into your books. That’s why it’s important to stay up to date and make sure the information in your books is accurate. It provides you with the ability to get a look at your profitability with the click of a few buttons.
Need Help Generating Financial Statements?
At Summit Bookkeeping, we can help your company go through the accounting cycle, providing you with the necessary financial documents to make important decisions for your business. Give us a call at (360) 756-5020 to see how our bookkeepers can help you stay up to date with your financial responsibilities.