A profit and loss (P&L) statement or income statement is one of the most fundamental documents of a standard business plan. A P&L statement with revenue and expense details reflects the financial standing and performance of an organization over some time. A P&L record is a must for every business. It is beneficial for small ventures, start-ups, or big conglomerates to inform potential credit sources and investors about the income generation and cost management of your firm.
What is a Profit and Loss Statement?
Together with the cash flow statement and balance sheet accounting, the P&L statement is a part of the finance trinity to compare income statements from various accounting periods. It indicates the changes in revenue, gross profit, operating costs, net sales, expenditures, and net earnings over a while. The best medium to present your P&L statement to your investors is through a ready-made template PPT. A stellar slide deck combined with the visual charm of charts and graphs renders the data more digestible.
When to Prepare a P&L Statement?
Pro Forma P&L: A new business or a start-up should form a profit and loss statement at the beginning of the venture. It is called Pro-forma. P&L as the accounted data in this consists of projected figures of the future since you won’t have any actual income or expenses at this point. It is beneficial when you want to apply for funds or loans from banks and stakeholders.
Periodic P&L: Established companies should prepare P&L statements periodically. The ideal periods are monthly, quarterly, or annually. These reports assist you to compare your current earnings with the income of previous years to check if your net income is advancing or declining. It aids you to prepare your business tax returns and enhance decision-making.
Benefits of a Profit and Loss Statement:
- Decision-Making- A P&L statement will guide you to assess the financial performance of your company over a period. The full knowledge of expenses and profit turnover at hand will help a business owner to take concrete decisions regarding investments and savings rather than guesswork.
- File Business Taxes with Ease- As a business owner, it is required of you to file various forms of business taxes that are obligatory by the law of a country. An updated P&L statement along with other financial records prepare you to calculate statutory tax liabilities for easy returns.
- Assess Business Success- A well-defined chronological income statement helps a business owner to examine the performance over a period. It is vital to design it to play the right cards for investors and buyers if you intend to sell. It acts as proof of trust for business deals with clients.
- Predict Future Expenses- An income statement can help forecast future business expenses such as salaries, rent, training employees, equipment maintenance, and other overhead costs. It projects the expenses that ascend at a steep rate as a business expands gradually.
How to Prepare a Profit and Loss Statement?
Businesses can compose an income statement using digital accounting software with P&L templates or Excel with ease. Once prepared, assimilate the information in engaging PowerPoint presentations to infuse it with a visual appeal. Form charts and diagrams to exhibit your profits and losses to attract your clients. This section will assist you in creating perfect income statements for every business. Let us begin!
Gather Cash Flow Insights (Incoming and Outgoing)
To prepare a flawless P&L statement, it is a requisite to gather information about the money that flowed into and out of your business account over time. Maintain a clear-cut record of expenses and revenue generation from your operations. If you already keep a cash flow statement, it may contain the figures that you need.
Ascertain a Time-Period
Business owners must select a time-period to draft an income statement. You can choose to calculate the profits and losses on a monthly, quarterly, or annual basis. A P&L statement of less than a month will not showcase any significant trends as the time-window is short. On the other hand, more than a year leaves too much gap.
Calculate the Revenue/Income
Revenue generated is the total amount of money your business obtained from its various endeavors. It shows your net income from the sale of products or services. Place each revenue source in its line on your P&L record. Once listed, add each of them for your gross revenue. Your income sources may include:
- Sales Revenue- Income from the sale of goods
- Affiliate Commissions- Commissions earned for your services
- Rent and Lease Payments- Income from leasing property
- Capital Gains- Profits from capital assets or equipment
Calculate the Costs/Expenses
Itemize the expenses or costs of your business for the chosen period. Assemble a list of the money that flowed out of your business to carry out vital company operations. Do consider costs like returns and refunds while accounting for the expenses in the statement. Some cost to consider are:
- Direct Costs- Cost of goods sold (COGS) includes manufacturing costs, shipping, storage, etc.
- Supplier Costs- Cost of purchasing goods
Estimate Gross Profit
Subtract the revenue collected from the cost of goods sold to arrive at your gross profit earned. It is the profit that your business acquired from selling your products and services. It is also sometimes referred to as EBITDA. It indicates earnings before interest, tax, depreciation, and amortization.
Analyze Operational and Non-Operational Costs for Operating Profit
Operating Expenses (OPEX) include the indirect expenses that impact your daily business operations like monthly utilities, rent travel, payroll, postage, office supplies, and marketing costs. Another term for these is Selling, General, and Administrative Costs (SG&A) that help a business to run smoothly. Non-Operational Costs include interest on investment and savings. To obtain operating profit/loss, subtract the operating expenses from gross profit.
Determine ITDA (Interest, Taxes, Depreciation, and Amortization)
Determine your net income that is your income after the payment of certain factors. It includes interest on debts like credit card accounts, business loans, lines of credit, etc. The taxes integrate various taxes like income tax, service tax, customs, and others. Depreciation cost refers to the expenses borne by the company to maintain the wear and tear of equipment and physical assets over time. Similarly, Amortization refers to the process of reducing the value of a loan or an intangible asset like copyrights over time.
Calculate Net Income
Your final step to assess your net profit or loss is subtracting the value of your gross profit (EBITDA) from the figure acquired after calculating interest, taxes, depreciation, and amortization. To make it more simple, remember that anything outside of your direct costs refers to an indirect expense that you reduce from the gross profit to get your net profit. The formula for net income is as follows: Net Income= EBITDA- (Interest + Taxes + Depreciation +Amortization).
If your net income is positive, it is a good sign for your financial health. However, if it is zero or negative, it calls for a change in strategy and reevaluation of business practices. P&L statements are a valuable tool for business owners to render them profitable.
HussaiN is a full-time professional blogger from India. He is passionate about content writing, tech enthusiasts, and computer technologies. Apart from content writing on the internet, he likes reading various tech magazines and several other blogs on the internet. Email ID: [email protected]
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