What is a Profit and Loss (P&L) Statement?|
How do I create one? How do I know if my Business is Profitable?
While you work to always put your customers first, at the end of the day, you can’t help them and stay in business if you’re not profitable and making money. A Profit and Loss (P&L) Statement is a great tool for any business to use and will help you determine whether or not your business is profitable, how much of a profit you’ve made or if you have incurred a loss.
A P & L Statement is also commonly referred to as an income statement, revenue statement, statement of financial performance, earnings statement, or statement of operations and displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e.g., depreciation and amortization of various assets) and taxes.
A P&L statement is one of the most important financial management reports a business manager can create because it measures revenue (sales) and expenses over a month, quarter or year. It will tell you how well you are managing your business and provide information on how to grow your business in order to reach your goals.
The important thing to remember about a P&L statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time.
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To create a P&L Statement for your business, follow the basic formula below:
– Cost of Goods Sold
= Gross Profit
= Net Profit
Cost of Goods Sold – Total expenditures for inventory items, which can consist of the cost of purchasing the items, freight, manufacturing costs, modification costs, and packaging. For services, this is the cost of providing the services, including labor, material used, and transportation.
Sales (Income or Revenue) – Income and Revenue from selling your product/service during a certain time period.
Gross Profit: Sales minus Cost of Goods Sold
Overhead: Expenses associated with your ongoing business operation, such as rent, utilities and payroll.
Net Profit: Gross Profit minus Overhead. Net Profit is what remains to pay for expansion, equipment, loan repayment, income taxes and owner’s draw.
Compiling a P&L Statement
Accounting software programs have the ability to compile a P&L statement at the push of a button. The accuracy of your P&L statement will depend on how your accounting software is set up for your company and how you input data. By printing out your P&L regularly, you will be able to track your progress and use it as a tool when making business decisions. The P&L statement is the foundation for other reports, such as a cash flow projection, so make sure that your accounting software is up-to-date and that data is being imputed correctly.
In general, it’s always a good idea to consult an accountant when handling financial information for your business as they can advise you based on your individual circumstances.
Sample Profit and Loss Statement:
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