Small businesses rely on several tools to help track growth and overall company health, including financial statements. One of the most beneficial financial statements to a company is a Profit & Loss (P&L) statement. This helpful document could be the key to discovering areas of concern in your business or help shape future business decisions. Keep reading to learn more about P&L statements and how they can benefit your business.
What is a Profit and Loss Statement?
A Profit and Loss Statement is a financial statement that summarizes your business’s revenue, costs, expenses, and gross and net income over a period of time. P&L statements are generated regularly, typically monthly, quarterly, or annually. Sometimes a business will include data from a previous period for comparison. Businesses use P&L statements to find out if they need to make any adjustments to business operations to remain profitable.
Why profit and loss statements are important
Profit and loss statements are an essential tool for small businesses today. Here are some of the reasons why they are so important to the health of a business.
They help you make better decisions
A profit and loss statement provides essential data that is key to making decisions about your business. Business owners use the information to decide if their growth strategy is working or if it needs to be tweaked (or scrapped). A P&L statement also clues you in if you can afford to hire new employees or expand operations. If your company has taken on debt, a P&L statement lets you know if you’re making enough money to pay back your loans.
Using a P&L statement can also help you analyze specific areas of your business. You can see what parts of your business generate the most revenue or find areas that are overrun with extra expenses.
They prepare your company for tax time
What better way to get prepared for paying taxes as a business than keeping updated P&L statements. All of the information you’ll need to file your business taxes will be on hand already, including up-to-date accounting software.
They are like a health assessment for your business
P&L statements let you see the data behind the scenes of day-to-day operations. That can be good and bad. It lets you know where your business needs to adjust, but a P&L statement can also tell you where you’re getting things right. It can signal to you and others that you’re making the right decisions.
How to create a profit and loss statement
Creating a profit and loss statement can be time-consuming, especially if you want it done correctly. Your accounting software may come with the ability to generate financial documents like a P&L statement. If not, you can create one manually.
P&L statements can look different depending on the company, but typically they all include four main sections:
- Revenue: This is your business’s total sales and income
- Cost of goods sold: The costs related to producing your goods or services
- Expenses: Daily operating expenses that don’t directly lead to sales, like rent and employee salaries
- Net income: Your net income is what’s left after subtracting all of your company’s expenses
Each of these sections makes up a line on your statement. Your income obviously is the largest number. When you subtract your cost of goods sold, you end up with your gross profit. Next, you’ll subtract your expenses, which leaves you with your net income, your company’s bottom line. Some P&L statements may include other sections depending on the nature of your business.
For small business owners, staying profitable will help you reach other business goals. Using tools like a profit and loss statement helps ensure that you’re able to properly analyze and adjust your business operations and plan to continue down the right path.
Kevin Payne is a personal finance and travel writer. His work has appeared on websites like Forbes Advisor, Investopedia, Credit Karma, and FinanceBuzz. He is the family travel and budget expert behind FamilyMoneyAdventure.com. Kevin lives in Cleveland, Ohio, with his wife and four kids.