As a small business owner, you’re deeply involved in every aspect of your company. You might be the hiring manager, marketing director, and accountant, all in the span of one day which is why you need to know what a profit and loss statement is.
Knowing the roles you have to play is important to have at least a basic understanding of each one. This is especially the case if you’re responsible for preparing your company’s financial reports.
The three most common reports you’ll need to create include a balance sheet, cash flow statement, and a profit and loss statement (P&L). Of these three, a profit and loss statement is one of the most essential, revealing key data about the current and future stability of your company.
As your business grows, you may be able to expand your accounting efforts into an official department or outsource those services to a third-party provider. Until then, it pays to know the ropes.
Read on to learn how to create a P&L statement by using our sample profit and loss template!
What is a Profit and Loss Statement?
A profit and loss statement is also referred to as an income statement. In short, it measures how much your business earns (net operating profit) during a given timeframe, compared with how much it spends (net loss).
This makes it a quick and effective way to tell whether or not your company is earning money or losing it. You can analyze this report to better understand your overall business performance, as well as identify areas for potential growth and improvement.
Do your profits outnumber your losses and do your outgoing invoices outweigh your incoming bills? If so, great! That means you’re generating excess funds that you can reinvest back into your business, save for later, or use for countless other purposes.
Conversely, if your losses are greater than your profits, it’s a clear sign that your business needs a turnaround to remain sustainable in the future.
Timelines for Measurement
The exact timeline you choose to measure your profit and loss activity is up to you. Most business owners perform this assessment on a regular, consistent basis using the following time periods:
If your business is very small or still in its startup phase, your P&L statement might be just a few lines long. On the other hand, a major business could have one that takes up volumes.
Ultimately, the length of your statement depends on how complex your business is. If you only have a few sources of income and minimal expenses, you won’t require too much space. On the other hand, if your income streams are many and varied, it can be a much longer document.
What does a complete profit and loss statement look like? Depending on the software you use to create yours, the exact layout might vary a little, but this statement should be a basic table.
You can use Google Sheets, Excel, or any other accounting spreadsheet tool to populate the empty fields and then have it automatically total each section.
Profit and Loss Statement Line Items
If you’ve never prepared one before, compiling a P&L statement might feel a little daunting. Fortunately, the process is straightforward, as long as you know which fields and data to include.
That said, let’s take a look at the basic line items that should be included in any profit and loss statement, regardless of your business size or industry.
You’ll always open your profit and loss statement by summarizing the revenue that your business earned during that set timeframe.
In the statement itself, this will only be a single line item. Yet, it will tie back into and reference a much longer spreadsheet that breaks down everything you earned.
Direct Costs/Cost of Goods Sold
Next, you’ll need a line item for direct costs, or cost of goods sold. These business expenditures are directly related to the costs incurred to produce or sell your product or service.
In addition to the physical materials used to create the product, it also includes any direct labor required to complete the effort. If you purchase your products from a supplier rather than making them yourself, this would also include your supplier costs.
Note that this line item does not include indirect costs associated with keeping your business afloat including marketing, rent, insurance and more.
Gross Profit and Gross Margin
Next, you’ll subtract your direct costs from your revenue. The outcome is your gross profit, which you will represent as a dollar amount.
To calculate your gross margin, simply divide your gross profit by your revenue. You will represent this line item as a percentage.
Of course, the higher your gross margin, the better. This represents the profitability of your business and will be of top importance to future partners, as well as lenders and investors.
Lower down on your P&L statement, you’ll have space to include all of the indirect expenses your business incurred.
These are your everyday operating expenses, or the payments required to keep your doors open and your business operable. They can include, but are not limited to:
- Payroll services
- Marketing and advertising
- Business utilities (phone, internet, electricity)
- Administrative costs
- Facility rent
- Office supplies
- Equipment maintenance
- Business loan interest
- Employee training
Depreciation is another indirect cost to include. On this line, you’ll list any business assets that have lowered in value since the last statement.
Earnings Before Interest and Tax (EBIT)
Your EBIT will be one of the last lines on your profit and loss statement. While there are a few different formulas you could use to calculate it, this one is the simplest:
Revenue – (Operating Expenses + Costs of Goods Sold)
This answer reveals your company’s earnings before interest and tax are calculated.
Earnings Before Tax (EBT)
Depending on the granularity of your statement, you may also want to include an EBT line item. Similar to an EBIT, this determines your earnings before tax.
To find it, perform the following formula:
Revenue – (Cost of Goods Sold+ Operating Expenses + Depreciation)
The last step in preparing your profit and loss statement is to calculate your net income! To find it, subtract all of your indirect (operating) expenses from your gross profit.
In essence, this is your business’s bottom line. It represents the net profit (or net loss) you experienced during the timeframe and paints a picture of where your company is headed.
If your net income is positive, you’re on the right track. If it’s negative, you can pinpoint the areas in which you’re overspending and brainstorm ways to reverse the trend.
A Sample Profit and Loss Statement to Follow
Knowing the line items to include, let’s take a look at a sample profit and loss statement. This way, you have a visual guide to follow as you create your own. Keep in mind that your final statement will be in graph form (not bullets).
Once you’ve added your company name and address to the top left corner of the sheet, include a line for the title and timeline, as follows:
- Company ABC
- 123 Apple Tree Lane
- Chicago, IL 60007
- Profit and Loss Statement
- For the Period January 1, 2019 to December 31, 2019
Next, title your “Revenue” section and add a line for your revenue and total revenue.
- Revenue: $125,000
- Total Revenue: $125,000
Then, title your “Direct Costs” section and add lines for your wholesale product costs and direct labor.
- Direct Costs
- Wholesale Product Costs: $60,000
- Direct Labor: $34,000
- Total Direct Costs: $94,000
Next, subtract your total direct costs from your revenue to get your gross profit and gross margin.
- Gross Profit: $31,000
- Gross Margin: 25%
Then, list all of your operating costs, or indirect expenses.
- Marketing and Advertising: $6,500
- Utilities: $3,200
- Insurance: $950
- Loan Interest: $1,100
- Office Supplies: $1,300
- Equipment Maintenance: $250
- Employee Training: $1,500
- Total Expenses: $14,800
Finally, you’re ready to calculate your net income.
- Net Profit/Loss: $16,200
Analyzing Your Profit and Loss Statement
It’s essential to compile this data and create this report. However, how can you analyze a P&L statement to make sure you’re deriving the correct business insights?
There are a few approaches you can take. This might include analyzing your statement based on a few factors:
- Yearly comparisons (How did your business change/grow from one year to the next?)
- Gross margins (What do they represent about your company?)
- Future projections (What do these trends say about our future cash flow?)
- Changes in monthly sales (What influenced the numbers?)
- Possible expense reductions (Where can you cut back and save?)
- Income sources (Are they sustainable?)
These are just a few of the questions you can ask as you analyze your business’s profit and loss statement.
Use Our Sample Profit and Loss Statement and Gain Access to the Business Tools You Need to Grow
A profit and loss statement can reveal important information on your business’s financial health and future trends. In a few short line items, you can learn more about your profitability, as well as identify any areas of risk and vulnerability.
Though critical, it is just one example of the tools and resources that small business owners will require. As you strive to grow your new business, other services will become necessary.
In addition to accounting support, you might also require credit card processing, group health insurance, web services, and more. Thankfully, Your FundingTree is here to help!
Check out all of the business services we offer to growing small businesses throughout the U.S. and Canada.