As a small business owner, understanding the profit and loss statement (P&L) is absolutely crucial. The P&L is an important tool for small business owners to have, use, and maintain on a regular basis. Consider using accounting software to make P&L creation significantly easier.
The P&L helps you see an accurate picture of your finances. You can use a P&L to present your business’s health to others. You might show potential investors, accountants, or auditors your profit and loss statement.
What is a profit and loss statement for small business?
What exactly is a profit and loss statement? And, how do you make one? It’s actually a fairly straightforward process. Your profit and loss statement looks like a spreadsheet with various line items. Every P&L has similar components.
The profit and loss statement exists in every industry. The P&L is a summary of your total revenue for a particular period of time, compared to your total expenses. The bottom line of the statement contains your net earnings (your profit and loss).
Creating your profit and loss statement
In the simplest terms, you start the P&L with your revenue. Then, you continue by subtracting your expenses. There can be hidden costs of running a business, so we break down each expense in the following sections.
The following items should be sections or lines on your statement:
- Revenue: First, list the money you earned from the things you sell — plain and simple. This is your top-line revenue. You report your money earned from sales over your chosen period of time on this line. The figure should be a positive number. The rest of your statement will contain mostly negative numbers (representing costs).
- COGS: Cost of Goods Sold (COGS) shows your expenses related to producing the items or services you sell. This includes hourly labor and raw material purchases.
- OPEX: Operating Expenses (OPEX) involve costs associated with running your business as a whole. OPEX include salaries (not man-hours), rent, and utilities. These expenses keep your business going, but they do not produce sales.
- Tax expenses: You report any taxes paid in a separate section of the profit and loss statement. Separate each different type of tax on its own line.
There are several other items that you can account for in the P&L. Depending on your industry, some items may not apply to you:
- Depreciation: When you buy equipment, the equipment becomes an asset. The item immediately begins to depreciate (lose value). Your depreciation expense journal entry is not a “real” cash line item. Instead, depreciation represents the value of your assets. Your depreciation line on the P&L can be a significant number that impacts your business’s worth. Depreciation is sometimes lumped in with COGS (mentioned above).
- Financial costs/gains: This line item can be positive or negative. Financial costs/gains represent changes in your investments or debts. Generally, this line shows one of two things: 1. You have accrued interest in money you owe 2. You earned interest from your investments.
- Extraordinary costs/gains: This line generally shows one-time impacts to your business. For example, let’s say you sell a large, depreciated asset. You want to record that sale with extraordinary costs/gains. You may make a large, one-time purchase. You record that expense with extraordinary costs/gains, too.
- EBIT/EBITDA: EBIT (Earnings Before Interest and Taxes) and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) are statements about your company’s performance. They do not account for events outside of your control, such as changes in tax rates. Combine all line items in the statement besides EBIT and EBITDA to find these figures.
Adding it up
- Financial statements. You can combine the line items on the P&L to make other statements about your company’s financial status. You report these figures on either an Earnings line or a Profit line.
- Shareholders. It may be appropriate for you to include items in the P&L about shares. This line could be a statement to shareholders.
Once you’ve mapped out you finances, how often should you update your profit and loss statement? It is a matter of preference. Many factors affect how often you refresh the report. Factors might include your sales, expenses, or working capital. You know your business best, so it’s best to pace your P&L update in a way that is meaningful to you.
The final word (or bottom line) on a profit and loss statement is that it is absolutely necessary. Few other statements can wrap up your company’s finances as well as a P&L. P&L management and setup may take some time. But once you do it, you’ll be well on your way to having an accurate picture of your business’s financial health.
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