You can’t have the fun parts of running a financially successful small business without the nitty-gritty of financial management too. A profit and loss statement (P&L) is an important reporting tool that will give you a clear picture of where your money is going. Understanding a P&L statement and how to organize one for your own business will give you greater control over your finances.
What is a Profit and Loss Statement (P&L)?
A profit and loss statement is an income statement that reports your small business’s revenues, expenses, and, ultimately, its net profits and losses over a specific time period. This statement is also called an income statement. It is one of three financial documents business owners should consistently create to monitor financial health and make important financial decisions. The other two financial documents business owners should know about are balance sheets and cash flow statements.
How Does a P&L Differ from a Cash Flow Statement?
A P&L statement is often confused with a cash flow statement. A cash flow statement summarizes the ways money flows in and out of your business. The two, however, are different despite being equally valuable to your finances.
A cash flow statement provides a breakdown of how you are spending your money on business-related activities, including operating and investment expenses. The cash flow statement is a more detailed explanation of where cash flows into the business and where it is being spent when it flows out of your business.
A profit and loss statement, on the other hand, is an overview rather than a detailed breakdown of all your financial activities. It shows what your business’s overall profits are and is calculated through understanding your income versus expenses.
How to Write a Profit and Loss Statement
Your small business’s profit and loss statement will represent a specific time period, similar to the specific time used in a cash flow analysis. Typically, this span of time would be monthly, quarterly, or a fiscal year.
The primary components of a profit and loss statement are:
- Revenue
- Cost of goods sold
- Gross profit
- Expenses
- Operating income
- Net profit
Revenue
Revenue will represent the net sales that happened during your chosen time period. This will include money made from selling your product or service, and non-operating revenue, which is money earned aside from selling your product or service. This could include money made from investments.
Cost of Goods Sold
This refers to how much money you put into delivering your product or service. Since your statement is for a specified time period, you would only factor in how much money was invested in the manufacturing of your product or service for that span of time. This cost may include the price of labor, materials, and manufacturing overhead.
Gross Profit
This is the profit that your small business earns after you deduct the costs of goods sold from your net sales.
Operating Expenses
Similar to the cost of goods sold, this is another figure that shows the money you’ve invested in the function of your business. Operating expenses refer to administrative or rental expenses, payroll, utilities, or any other expenses important to running your business.
Operating Income
Operating Income is the profit earned from a business’s ongoing operations. This figure takes your business’s gross profit, then subtracts all of your operating expenses.
Net Profit
Net profit is the total amount of money your small business earned after you deduct expenses. This figure is the product of taking your gross profit and subtracting the total expenses.
What Does a Profit and Loss Statement Look Like?
As a small business owner, it’s helpful to have a profit and loss statement sample or income statement template to get started. For a more formal and detailed profit and loss statement sample, visit the IRS.gov’s site and download the Form 1040. Another place to see a sample p&l statement is from Freshbooks, a cloud accounting software company whose product integrates with your NorthOne small business bank account. Check out Freshbook’s Sample Income Statement article for more information.
As a business owner, dedication to your business’s financial wellness is just as important as your dedication to your customers. Without a financially healthy business, you can’t continue to serve your loyal customer base. Be diligent about regularly creating financial statements, including income, profit and loss, and cash flow statements, so you can continue running a successful business for many years to come.
