Profit and loss statements: How a P&L statement provides business insight
Editor’s Note: This post is focused on helping you understand profit and loss statements. This document is used by most small business owners to help assess business profits and losses coming in and out of their business. Read on for insights!
The question of “how is your business doing?” is generally not a subjective one. So, how does a small business owner get concrete insight to performance? The answer can be found in a profit and loss (P&L) statement.
This document is a go-to gauge of small business’s financial condition and growth potential because you can also use the statement to gain insights about your operations and identify new opportunities for growth. We’ll get into that more below.
What is a P&L statement?
A P&L statement details a business’ revenue and expenses over a period of time. Statements are commonly based on a year, but they can also be made quarterly, depending on your line of business.
This statement is also referred to as an income statement because it shows the amount of income coming in and expenses going out. If the statement reveals the amount of revenue is higher than your expenses, your business is profitable; if the reverse is accurate, you’re running at a loss.
A P&L statement is similar to a balance sheet. The difference is the balance sheet provides a snapshot of a business’s assets and liabilities as of a certain date. Yet, both documents show the financial vitality of a business.
Does every business need to prepare profit and loss sheets?
You’re probably wondering if you have to file this document, especially if you are a smaller company. You might find that you will be asked to provide a P&L statement as part of applying for credit or you might want to include it in your business plan.
Even if you’re not required to file a P&L statement, it can be wise to have this document on hand for a company of any size as it provides a good snapshot of your business’ financial health. Don’t let the number crunching turn you away from these insights. That’s why we’re here. Block Advisors can create a P&L Statement for you as part of your annual tax preparation.
What does a profit and loss statement look like?
You’re probably wondering, “what does a profit and loss statement look like?” or “what does a profit and loss statement show?”
Let’s start with what a profit and loss statement shows. Here’s where you can answer some interesting questions about your business. For example, your revenue streams, margins and spending.
Looking at your P&L statement you can help answer the following questions:
- Which revenue streams are top earners? Which are my lowest?
- What are my margins?
- Where am I spending the most money? Where might I want to reduce spending?
Looking ahead as keen business owners tend to do, the real power of profit and loss statements can come from analyzing your business performance over time. What trends in sales or other factors can you detect that can help you make better decisions?
The insights above are laid out in your profit and loss statement. Here’s what that looks like:
The top line begins with an entry for revenue. The following lines subtract the costs of doing business, including the cost of goods sold, operating expenses, tax expenses, and interest expenses. There are sub-sections under these categories that detail the specific items. The last line is the difference, indicating your net income, otherwise known as your bottom line, profit, or earnings.
So, to summarize, it typically has the following sections:
- Total revenue
- Business Income
- Other income—this includes:
- Dividend income
- Income from investments
- Interest earned
- One-time income from an unusual source
- Cost of goods sold
- Total expenses
- Expenses—this includes:
- Automobile expenses
- Contract labor
- Legal fees
- Marketing/advertising expenses
- Office expenses
- Payroll expenses
- Professional fees
- Research and development
- Selling, general & administrative (SG&A) expenses
- Technology fees
- Other expenses—this includes:
- Expenses—this includes:
- Net income
What is included in a profit and loss statement?
While we shared what it looks like, it might be better to see what is included in a profit and loss statement by looking at an example.
Help with preparing profit and loss sheets
Whether you need help filing small business tax forms or are looking for someone to help with your profit and loss statement, we can help.
If you need personalized guidance, let us help. Block Advisors is dedicated to meeting the tax, bookkeeping and payroll needs of the self-employed and small business owners.
Our certified small business tax pros can help guide you to better decisions while taking care of financial tasks so you can focus on what you love. Learn more about our small business tax prep.