Owning a company requires adopting financial responsibility to strategize ways to make a profit, even when business isn’t going well. The easiest way to do this is by developing P&L statements.
P&L statements, or profit and loss statements, document where revenue was gained and money was lost due to various factors such as paying expenses.
There are many reasons to develop a habit of creating these statements. These are generally used as a representation of how your company is doing.
But you can use these statements for other reasons, such as a physical review of your company when inquiring with an investor.
If you want to understand when profits are lost and gained, read on and find out everything about these statements.
P&L Statements Have Many Names
There are different ways to identify P&L statements. They’re commonly known by these terms:
- Statement of Profit and Loss
- Income Statement
- Statement of Operations
- Statement of Financial Results
- Income and Expense Statement
Most professionals, entrepreneurs, and investors call the P&L statement an “income statement.”
Income Statements Show Profits Gained and Loss for a Period of Time
The most common way to develop P&L statements is by documenting the amount of revenue gained and lost.
This could be for a longer period, such as profits and loss gained in a year. This can also be for a shorter period, such as quarterly income statements.
Don’t think you’re limited to only creating one P&L statement per time period. Create as many as would fit your specifications. Most companies release a P&L statement per quarter and per year.
If you prefer to make yearly statements and compare them to previous years, you can still make quarterly statements to view your profits gained versus profits lost.
They Show More Than Profits and Losses
Don’t think you only view the amount of money you made and the amount of money you lost. P&L statements have other uses, such as identifying how much you’re spending and other necessary business expenses that cut down on profit.
The P&L statement also shows any changes made to your accounts, such as a new business checking or savings account.
You can also compare your income statements to your bank account and credit card systems to determine if you’re spending too much or if you’re in any credit card debt.
Income Statements are Used to Make Important Financial Decisions
P&L statements are commonly used to review a company’s profits and comparing them to past statements. This is done to determine if any decisions need to be made to cut down on costs or strategize ways to increase revenue.
When surveying these statements, you may decide to cut down on staff. Or, you could decide to buy materials from a different company or cut down on other expenses such as downgrading your office.
If you own a commerce company, a P&L statement could tell you that you need a different marketing strategy or you have excess inventory in your warehouse.
If you made a profit, you can find ways to increase your profit even further.
If you own a commerce company, you can decide if you have more flexibility to increase the cost of your products or develop more sales and offers for your customers.
You can also make other decisions such as hiring, moving into a larger or luxurious office, and offering more benefits for your employees.
But a successful P&L statement campaign combines the strategy of driving revenue while cutting costs.
Income Statements Help Investors
Whether you own a small or a large business, you’ll need an investor at some point. Since the investor is usually using their own money to help capitalize your business, they want to make sure their investment is worth it.
When they determine the strength of your company, they will look at your P&L statements. Some may only look at your yearly statements, while some may request your quarterly or even monthly statements.
Income Statements Help Prepare Taxes
Businesses have to pay both quarterly and yearly taxes, and the amount they owe depends on their filing status and the amount of revenue they claim.
If you’re unsure of the amount of revenue you should claim, having an updated P&L statement will help when filing your taxes.
P&L statements also help your accountant or tax preparer. Be sure to submit your statements to them, as well as the statements for the previous year.
These statements will help your accountant determine any write-offs or changes in your taxes that require a separate filing.
How to Create a P&L Statement
When creating P&L statements, you have to follow a specific format. You start with something called the ‘top line.’ The top line is commonly known as the entry for revenue or gross sales.
You start with the revenue you generated for the specific period. From there, you subtract the following areas:
- Cost of Goods Sold
- Operating Expenses
- Tax Expenses
- Interest Expenses
After these expenses are subtracted from the top line, you create the bottom line. The bottom line is the amount you earned after the expenses have been subtracted.
There are many ways to create your P&L statement. You can do so manually by using a program such as Excel or Google Sheets.
There are also P&L statement templates available online. These are commonly used because of their convenience and flexibility.
How to Determine Your Expenses
While the P&L statement makes sense, maybe you have questions on the expenses you’re subtracting from your gross sales. For example, maybe you didn’t consider the cost of taxes or any interest.
You should always keep track of your business expenses, but maybe you never documented them as often or maybe you weren’t as organized.
Regardless of how often you make P&L statements, you need to keep an updated log on expenses per time period of the statement. For example, if you make quarterly statements, keep in mind the amount of taxes you owe for that quarter.
The easiest way to do this is by hiring an accountant or outsourcing an accounting firm. But if you would rather handle this method yourself, keep an account of all business expenses.
- A number of sales you make in a period
- Any costs of operation (an office, materials purchased, employees and their benefits, etc.)
- Setting aside money for taxes
- Any interest on a loan or a mortgage (if applicable)
Income Statements and Business Size
While P&L statements are important for any business owners, all businesses come in different shapes and sizes.
Because of this, the CEO of a large corporation will have a much different statement than the small business LLC owner who sells arts and crafts part-time.
The key factors of a P&L statement are documenting profits and losses in a certain amount of time. While all business owners should document all profits and losses, the amount of time to document them is flexible.
For example, the corporate CEO needs to document statements at least quarterly. He or she probably has several expenses such as a mortgage on an office and a lease on a warehouse and a large staff expanding multiple cities.
On the other hand, the part-time artist may only need to make their statements once a year. This will help determine how much sales they’re receiving alongside small expenses they need to pay.
Do I Really Need a P&L Statement?
The answer is simple: if you own a business, you need to make a P&L statement.
You may not think it’s necessary; a P&L statement isn’t required by the IRS, your business filing, or any other significant form. So it’s easy to overlook the necessity of this statement.
Medium-to-large size companies know how important a P&L statement is, and in some cases are required to create one.
But it can be difficult for a small business or sole proprietor to understand why they should create a P&L statement. If you’re not generating a large revenue and have small business expenses, then what’s the point?
But what if you want to reach out to an investor or an accountant? Or you’re applying for a business loan?
This is why it’s important for all businesses, big or small, to get in the habit of creating P&L statements.
Even if your small business isn’t generating any sales, a P&L statement shows any expenses you’re making to sustain the business, and can even give you insight on marketing efforts to start gaining revenue.
Are You Ready to Start Creating Your P&L Statement?
Making an income statement may seem intimidating, but it’s easier now than ever. As long as you’re documenting all earnings and expenses, you can easily create your income statement.
Creating an income statement determines the amount of gains and losses, as well as other important areas such as getting an investor or hiring an accountant.
If your company needs help with accounting, we can handle all your financial needs. Get in touch with us to find out how we can help.