A profit and loss statement (usually abbreviated as a “P&L”) is a short document that will give you a quick snapshot of your business’s health, showing your business’s income and expenses over a certain defined period of time. You may want to see these numbers monthly, quarterly or annually, depending on why you need the P&L in the first place (they’re useful for everything from cash flow analysis to applications for business loans).
Here’s how to complete a profit and loss statement:
Step 1: Keep spotless records of the time period you need.
Step 2: Calculate your revenue, or how much money your business brought in.
Step 3: Calculate your expenses, or how much you spent by operating.
Step 4: Subtract expenses from revenue to find your profit.
That’s the simple, straightforward, 4-step process.
Want to go a bit more in-depth? Here’s the nitty-gritty process:
If you don’t have records of money coming into and going out of your business, a P&L statement will defeat you before you even begin. Hire a bookkeeper or use bookkeeping software like Quickbooks or Xero to ensure you have a good way to gather all the relevant financial numbers for your business.
Are you looking to find out what your company last year or last month? Pick a time period and stick to it! Everything else in the steps below will depend on the time period you chose.
Revenue is the total amount of money your business brought in. How much did your business make in revenue during the time period you chose for your P&L?
How much did your business spend on office supplies? Contractor labor? Advertising? Gather up every expense your business made during the P&L time period.
Do you create or manufacture a product? Then you may have to consider cost of goods sold. Did you have any returns or refunds? Make sure to take these into account as part of your business bottom line.
Your profit is your revenue minus expenses. Lenders may ask you to break these numbers down into Gross Profit (Sales – Cost of Goods Sold) or Operating Profit (Gross Profit – all other expenses.) Or you may want to determine your Net Income, which is how much your business actually brings home even after taxes.
Bookkeeping software like Quickbooks and Xero will generate a P&L for you. If you don’t have the time to run the numbers yourself, you can generate these reports with an app.
Use each P&L you generate to keep track of your business’s financial health. Are your expenses higher than your income? Then your business may be in trouble. You should dig down into expenses to determine where you’re losing money. Do you consistently notice that your business does best in Q4? It may be time to focus on marketing and running ads in that quarter to capitalize on that momentum.
We all want our businesses to be profitable. Use a P&L to find trouble spots and evaluate your business’s financial health early and often—and keep your P&L up-to-date for easy access when applying to small business loans!
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