How to Get a Handle on Profit and Loss Statements

One of the most important financial statements for small businesses

2/13/2017 12:00:00 PM
How to Get a Handle on Profit and Loss Statements

Out of all the financial statements that you need to maintain while running a business, profit and loss statements are among the most important, enabling you to assess your business’s current finances and make projections for the future.

A profit and loss statement, also known as a P&L statement or an income statement, includes all income and expenses over a certain period of time. This lets a business analyze its losses and profits and determine how much it will make once its expenses are all accounted for. Typically, the period of time it covers is a few months, although an annual profit and loss statement can be useful to compare financial performance on a year-to-year basis.

There are many components needed to put together a profit and loss statement. First, you must calculate the cost of goods sold.

“Costs of goods sold include things like raw materials, inventory and payroll taxes,” says Paul Lester former contributor to the community. “Make sure to also factor [ ] overhead costs such as repairs, utilities, insurance and legal fees into your operating expenses to ensure your net profit is accurate.”

You can then subtract the cost of goods sold from net sales to arrive at your gross profit. It is important to remember that gross profit includes only the expenses that come from the cost of goods and doesn’t include your income taxes or operating expenses. 

Operating expenses are a separate category that you need to include in your profit and loss statement. There are a wide variety of expenses that are included under the umbrella of operating expenses. A few examples are employee salaries, marketing costs and the price of renting equipment or office space. Talking to your financial advisor can help you determine all of your operating expenses so that you know which numbers to keep track of for your income statements.

Total expenses, net income before taxes, taxes and net income round out the figures that need to be calculated for your profit and loss statement. If you don’t have these numbers because you are just starting out, you will need to make educated guesses to create a projected profit and loss statement, known as a pro forma statement.

“List all possible expenses, over-estimating so you aren’t surprised,” recommends Jean Murray, a business coach with an MBA and a Ph.D. in entrepreneurship, in a contribution to The Balance. “Under-estimate sales, both in timing and amount.”

Going through all this effort is worth it to reap the benefits provided by having accurate profit and loss statements. These statements help you analyze the current financial situation of your business to better plan for the future and catch any growing problems before they become too big. Maintaining accurate statements throughout the year also helps you complete your annual tax filing more efficiently.

Lastly, if you want to take out a business loan to grow your business, you will likely need to provide your financial institution with a profit and loss statement.

Businesses typically use specialized software to make the calculations and format a profit and loss statement automatically, but it is still important to understand the numbers that go into the calculations so that you are sure to document and retain all the necessary financial information. This guide should help you gain a general understanding of what goes into a profit and loss statement.

Published by North Shore Bank. Includes copyrighted material of IMakeNews, Inc. and its suppliers.

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