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Confused by your profit and loss statement? If you don’t have a numbers background, the accounting jargon can be a little confusing at first. But once you learn the terminology, you’ll have a much better understanding of the information contained in these documents.
Use this guide to ensure you can translate a profit and loss statement like a pro, and as a reference if you need help preparing one.
Profit and loss statements (also sometimes called P&L statements, income statements, or revenue statements) give you a nice picture of the net income of your business. That’s done by subtracting all of your expenses from the total revenue you bring in. The complexity of these statements varies by business. While a single consultant might have a very straightforward and simple statement, a restaurant with many employees, vendors, and expenses to record might have an extremely complex statement.
P&L statements can be generated to track income and expenses over any period of time. Most commonly, they are produced monthly, quarterly, and annually.
The first time you look at a profit and loss statement form, you might find yourself scratching your head. There is a lot if unfamiliar information if you aren’t a financial pro. Let’s explore the things you need to know to crack its code.
The first step in deciphering a profit and loss statement is knowing the definition of each of the various parts referenced. Here are the most common terms, and their definitions:
First things first: don’t be intimidated by your P&L statement. Remember a profit and loss is simply trying to look at your sales minus your costs. Of course, it can get more complicated from there.
When you’re looking at your profit and loss, it usually will list sales/revenue/income first (or all the money your business has made), costs/expenses next (what it costs your business to make that money, and end with profit/net income. You’ll see many subtotals through, but you are ultimately looking for that profit number at the bottom.
Depending on the details of your business, these categories can be broken out in different ways. For example, you might reference different sources of revenue if your business does generate revenue through different means (e.g. in-store sales and online sales). Think of this is the “top line” of your profit and loss statement.
You’ll also probably break out your expenses (e.g. overhead and materials). Usually you’ll see costs broken out based on the cost of delivering your product or service (COGS), and the general operating costs of the business (OPEX). People start looking at Revenue – COGS to get their gross margin. This gives you an idea of how much you have left over to cover other expenses after you’ve covered the cost of producing your product or service. Your EBITDA, also known as Operating Income, is the result of Gross Margin – OPEX. See where we’re going with this? You’re then accounting for things like interest, depreciation, amortization, and taxes. This is what gives you…your bottom line.
Your net profit, net income, net earnings—whatever you want to call it—is your bottom line. This shows your business’s profit or loss. If you show a loss, it means you spent more than you earned. If you show a profit, it means you made more than you spent.
Remember that while a profit and loss statement form and an income statement are the same thing, you will reference other financial statements such as a balance sheet and a cash flow statement that will tell you very different things about your business. Don’t get these confused.
Now that you know how to read a profit and loss statement for small businesses, you’ll find it is quite easy to figure out how to prepare one.
The first thing that is important to note is our ultimate recommendation is that you use a top accounting software like QuickBooks and Xero to manage your books. Software like this will make it easy to automatically prepare a simple profit and loss statement, which is the best way to do so. Software like this also makes it easy to collaborate with a bookkeeper or an accountant, who can ensure these numbers are correct.
While this definitely costs money, you’ll save your business money in the long run by avoiding potential financial mistakes.
If you’re not quite ready to take on an accounting software, though, here are the steps you should follow to prepare a P&L statement:
As you can see, a simple profit and loss statement is all about answering the question: has my company operated at a profit or a loss over a specific period of time? As your prepare one, you can see how each source you reference brings you closer to an answer.
If you’re not using an accounting software to generate a profit and loss statement form, you might find it easier to reference a simple profit and loss statement template. This will help ensure you’re following the right steps as your prepare your form. Here are a few recommendations:
You’ll notice that each of these templates are for Excel. Excel or similar programs are certainly what you want to be preparing a profit and loss report in if you’re not using an accounting software. If you are not familiar with Excel, there are many wonderful resources available online to answer questions you come up against.
Before you prepare your first profit and loss as a self employed individual, you will most likely want to reference a few examples and samples to make sure you are doing your work correctly. Here are some good profit and loss statement examples and samples:
Most of these profit and loss statement examples and samples show the finished P&L statement. As mentioned above, one of the tougher parts is going to be ensuring your figures are correct on the P&L statement. We have to say it one more time: this is why having an accounting software and a great bookkeeper or accountant is essential—they’ll make sure that’s the case.
P&L statements are very important. In fact, most businesses are required by law to complete them. But aside from obeying the rules, profit and loss statements for small businesses give you the opportunity to review your net income, which is essential for making sound business decisions. You will also possibly need a simple profit and loss statement form if you plan to apply for a small business loan.
Understanding the insights that profit and loss statements provide can help you operate a more profitable business. Read your profit and loss statement regularly for signs that you are on the right track or for warnings that you might need to make some changes. A profit and loss statement for self-employed people can be a real business-saver. Compare and contrast your most recent statements with past statements for a better picture of your current standings and to help make informed decisions in the future. Staying on top of your finances is important when running a business. Regularly referencing your P&L statement will help you do just that.