Operating a small business can be tough, especially when it comes to managing finances. Understanding your business’s financial performance is the key to making proper business decisions. One of the most important financial statements is the profit and loss statement (P&L), or the income statement. The P&L shows how much your business earns, spends, and keeps as profit during a specific period. In this post, we’ll walk through the steps of creating a profit and loss statement for your small business.
Step 1: Gather All Revenue and Income Information
To create a P&L, you need to start with all the revenue and income information that your business has earned throughout the period. This could be from sales, services, or other activities, such as interest income, rental income, or investment income. All this information will help to create the revenue section of your profit and loss statement.
Step 2: Gather All Expense Information
After collecting revenue information, the next step is to bring together all expense information from your small business. Which may include rent or mortgage payments, utility bills, employee salaries, taxes, and any other expenses your business incurs. Then categorize each expense and have accurate records of them throughout the period.
Step 3: Calculate Gross Profit
Gross profit is found by subtracting total revenue from your cost of goods sold (COGS). And your COGS is the cost of the products or services that your business sells. Understanding your gross profit is important because it will help you determine the profitability of your small business.
Step 4: Calculate Operating Expenses
Operating expenses include all the costs associated with running your business. These expenses include rent, utilities, and payments on equipment, to name a few. Simply add all of these expenses up to determine your total operating cost.
Step 5: Calculate Net Profit
To find your net profit simply subtract your operating expenses from your gross profit. The result of this will let you know if your business is operating at a net negative or net positive. A net positive means that your business is profitable while a net negative means that your business is operating at a loss.
A P&L is important because it helps you understand the financial performance of your business. This holistic perspective will help you to make adjustments to better meet your financial goals. This guide is a fantastic resource to reference should you need help creating a P&L for your business. Remember to keep accurate records of your business as it will help expedite the process when the time comes.
Written by: Erik Hibbard