How to Create an Efficient Profit and Loss Statement

Hopefully, your business made a profit last year. After all, that’s the primary purpose of most companies – to turn profits and generate earnings for owners and shareholders. But how do you know how much of a profit your business made in the past 12 months? Or in the past six months? The past quarter?

Figuring out exactly how your business is performing requires more than just counting up your sales and the other money you have coming in the door. You’ll also need an understanding of how much you’re spending to determine the overall health of your business.

That’s where a profit and loss statement comes in. 

What is a Profit and Loss Statement?

A profit and loss (or P&L) statement is a financial report that shows your total income for a given period of time. Also sometimes called an income statement, a P & L statement is a tool for listing out your expenses (including your operating expenses, costs of goods sold, and taxes), your revenues (including gross sales and any other forms of income), your gross profit, and your net income.

A business P&L statement can serve several important purposes. In addition to showing the bottom line performance of your business, P&L statements can help you compare your expenses, revenue, and profit for different periods. You can also use a profit and loss statement to demonstrate the financial health of your business to banks and investors when you’re applying for loans or other types of funding.   

Components of a Profit and Loss Statement

Although a P&L statement can be customized to meet the different needs of different types of businesses, there are standard components that you’ll find on most business profit and loss statements.

Revenue

Your revenue generally includes all the money your business has generated by selling goods and services.

Cost of Goods Sold or Cost of Services

Sometimes called cost of sales or cost of services, this category of expenses should include direct expenses related to producing or providing the goods or services your business is selling. If your business sells shoes, the cost of goods will include all the raw materials needed to produce those shoes. If you provide fitness training, your cost of sales will include the time that you and/or your employees spent training customers. 

Gross Profit

Your gross profit equals your revenue minus your cost of goods sold. 

Operating Expenses

Operating expenses include the overhead costs of running your business. These costs do not necessarily go towards producing the goods you sell. Examples of costs you would categorize as operating expenses include marketing, rent and utilities for your office space, and insurance.

Operating Income

Your operating income typically refers to your business’s revenue less its cost of goods sold and operating expenses. Another way to consider it is your gross profit minus your operating expenses.

Other Income and Expenses

This category can include interest income, taxes, and expenses related to depreciation and amortization. 

Net Profit

Your net profit is your bottom line. This number considers all the sources of income your business has and subtracts all of its expenses. 

How to Create an Effective Profit and Loss Statement

Creating an effective P&L statement requires investing some time and effort, and many business owners would benefit from consulting with an accounting professional. But, at a minimum, putting together a P&L statement requires the following:

• Choosing a period: You’ll need to decide what period your P&L statement will cover. Most commonly, this will be monthly, quarterly, or annually.
• Gathering financial information: You’ll need a record of all your expenses and revenue for the period you’ve identified.
• Categorizing expenses and revenue: At the least, you’ll need to separate your cost of goods sold from your operating expenses. You’ll likely want to break these expenses down into smaller categories, like payroll, rent, and office supplies. 
• Calculating interest, depreciation, amortization, and taxes: You’ll need to adjust your income and expenses by amounts your business has earned or spent that aren’t directly related to the sales of your products or services.  

Once you’ve completed these tasks, you can plug in your numbers and determine your bottom line.

Interpreting the Results of Your Profit and Loss Statement

An effective profit and loss statement will give you the information you need about areas that are going well for your business and places where it may be underperforming. For example, if you notice your sales are steadily increasing. Still, your inventory costs are going up even faster; that could be a sign that you’re overstocking your inventory and might be able to cut back.  

Profit and loss statements also help you to evaluate business performance over time. While it’s nice to know exactly how much profit your business is making, it’s more valuable to know how that number compares to the profit you made last month, last quarter, or last year. Comparing your P&L statement for several months or quarters can help you recognize expense or revenue trends. 

Let Remote Quality Bookkeeping Help With Your P&L Statements

A lot goes into creating a profit & loss statement that will be useful to your business. You need to ensure that you’re correctly categorizing expenses, that you’re consistent with your accounting methods, and that you understand how to calculate the depreciation and amortization of capital investments. You also want to avoid mistakes that can lead to the IRS knocking on your door; for example, service-based businesses are not eligible for the cost of goods sold deduction, so must be careful about how those costs are portrayed on financial statements.

Consulting with a knowledgeable accounting professional can help ensure your business is on track with your financial reporting, including your profit and loss statements. The experts at Remote Quality Bookkeeping can ensure your financial statements are accurate, up-to-date, and contain the information you need to make important decisions about your business. 
Get in touch today and schedule a free demo to learn how our virtual bookkeeping and accounting services can help with financial reports.