A profit and loss statement helps determine whether your business is making money or running at losses.
Whether you run a small business or a large corporation, it’s important to track your business’s financial progress at specific time intervals.
A business profit and loss statement helps you do that by summarising the revenue, expenses, and income over a specific period to provide a complete insight into the business’s financial position.
It helps you determine future projects, consider expansion and acquisitions, and make financial decisions.
Hence, if you’re a business owner, you must know what a profit and loss statement is, how to create it, and its uses for your business. Let’s start with the basics.
What is a Profit and Loss Statement?
A profit and loss statement, also known as an income statement or statement of profit, gives you detailed information about the revenue and expenses of a business.
A simple profit and loss template takes includes cash inflows and outflows of a business during a specific period.
It’s like a scorecard showing a business’s ability to generate revenue, manage sales, and create profits after covering all expenses.
You can make profit and loss statements monthly, quarterly, or yearly for better insight into your business’s transactions.
Along with the cash flow statement and balance sheet, a profit and loss statement is also a requirement that you present to investors and auditors.
Uses of a Profit and Loss Statement for Your Business
A profit and loss statement gives you an idea of your business’s strengths and weaknesses. It also lets you determine several financial aspects of your business including the following:
- Determine whether the products and services you offer are drawing profits.
- Find out whether the business is going in the right direction. You can do this by comparing multiple reports and analysing the performance graph of your business.
- Deduce the overall financial health of the business. Financers often look for the net profit of a business before making investment decisions. The profit and loss report helps paint a clear picture of whether your business is making money.
- Provides visibility into gains, losses, and cost-saving opportunities by identifying areas that are not performing well.
- Lend greater ownership over the business’s funds, which helps the business remain fiscally viable over time.
- Evaluate your business’s performance based on the percentage increase or decrease in income and expenses.
- Identify accounting errors, omissions, discrepancies, or fraudulent activities.
If created well, the profit and loss statement can help make better business decisions and save your business from losses.
How to Make a Simple Profit and Loss Statement
You can use accounting software or a template to make a profit and loss statement. You can create reports monthly, quarterly, or yearly.
Once you have decided on the time frame, perform the following steps:
1. Calculate the Revenue
You start by calculating all the revenue your business gained in a certain period, for instance, a quarter.
Obtain these figures from current account balances, cash, accounts receivable, and other components of your balance sheet.
READ: Your Ultimate Guide to Preparing a Balance Sheet for Your Startup
2. Calculate the Total Cost of Sold Goods
The cost of sold goods is an important component of your profit statement. Include costs such as prices of raw materials, resource charges, employee wages, and any other costs applicable.
3. Determine Gross Profit
Calculate the gross profit by deducting the total cost of sold goods from the revenue. If the amount comes in negative numbers, it means you’re running a loss.
Gross Profit/Loss = Revenue – Cost of Sold Goods
The result is the amount your business has made or lost from selling its products or services over that period.
4. Deduce Operating Expenses
After calculating the gross profit, you need to calculate all your extra operating expenses, including rent, payroll, utilities, subscriptions, travel, equipment, etc. Add up all these expenses to arrive at the total figure.
5. Calculate the Operating Profit
Operating profit is the amount you get by subtracting operating expenses from gross profit.
A negative value here indicates an operating loss.
Operating Profit/Loss = Gross Profit – Operating Expenses
6. Add Additional Income
If your business makes any additional income you didn’t include in revenue, add that to the operating profit. Additional income may come from interests, investments, dividends, and other sources.
Adding it to operating profit gives you the total earnings of your business before paying taxes or taking depreciation and amortisation costs into account.
Total Earnings = Operating Profit + Additional Income
7. Calculate Taxes and Other Expenses
Calculate all additional expenses such as taxes, interest payments, depreciation, and amortisation expenses.
8. Determine Net Profit or Loss
Calculate net profit by subtracting all additional expenses in the previous point from total earnings. A negative value indicates a net loss for the business.
Net Profit/Loss = Total Earnings – Additional Expenses
READ: 5 Basic Steps in Preparing a Trial Balance for Your Business
Maximise Business Profits Now!
A profit and loss statement gives you a clear picture of where and how much your business is earning or losing in terms of revenue.
A decent net profit amount indicates good financial health and a well-performing business, which attracts investors and boosts further growth.
To maximise your profits, make smarter decisions like choosing viable web hosting plans, registering a domain from a reliable source, and saving money on cloud services.
Small steps can make a huge difference in your business’s performance and annual profit and loss statement!