Creating a profit and loss statement
Monitor your company’s bottom line using profit and loss statements.
Regularly generating a profit and loss (P&L) statement is an effective strategy for tracking your business’s money and financial health. By creating and reviewing P&L statements, you can keep an eye on whether your business is becoming more profitable or losing funds.
Here, we’ll explore the key components of a profit and loss statement for small business and give you an example to reference as you create your own statement.
What is a profit and loss statement?
A P&L is a financial statement that provides a snapshot of a company’s income and expenses over a certain time period. Typically, a business makes a P&L statement quarterly or annually — but they can be done more frequently, as well.
Reviewing recent statements and tracking trends in your profits or losses may help when making financial decisions. Keeping detailed P&L records might also prove useful when preparing your business tax returns. Further, if you are seeking investors or thinking about selling your business, you will likely want to have several years’ worth of profit and loss statements to provide to interested parties.
Creating a profit and loss statement for small business
P&L statements are made up of two main parts: income and expenses. Each part is broken down into additional components based on the type of business. For many businesses, there are a seven key components:
The first thing reported on a P&L statement is the business's revenue, including all generated sales during the time period. Other forms of income — such as investment income — will be taken into consideration later on, so be sure to exclude other forms of income in this section.
2. Cost of Goods Sold (COGS)
Next, businesses that sell goods must figure the cost of the goods they’ve sold during the time period. This should include any materials, cost of labor, transportation, production, or other related expenses that your business pays before you can sell your goods.
3. Gross profit
From there, subtract COGS from your sales to determine gross profit over the given timeframe. For example, if the COGS for one of your products is $10 and you sell the product for $100, then one sale will net you $90 in gross profit.
4. Other Income
In this section, list out all other income the business may have earned outside of day-to-day activity, such as income from interest, dividends, rents, gains from the sale of capital assets, etc.
Now, move on to the expenses of your business. This portion of your P&L statement includes all expenditures made to operate your business including payroll costs, office supplies, payments to vendors or contractors, professional fees, interest expenses, advertising costs and more.
Keep in mind, some purchases, such as equipment, may be treated as an asset and the expense written off over time. If you purchase a $1,000 machine that you will use for five years, for example, you would want to account for the asset for its entire usage. In this case, each year would reflect one-fifth (or 20%) of the cost.
After adding your ‘other income’ to your gross profit, subtract your total expenses to determine your company’s earnings before interest, taxes, depreciation, and amortization (EBITDA).
7. Net profit or loss
From there, list out any interest payments on business debt during the period, income tax — using an estimate, if needed — and any depreciation and amortization. Subtract all of that from your EBITDA to find your final net earnings over the period. These earnings will either indicate a profit or loss.
While some businesses use accounting software to create a P&L statement, you can also create one manually. The Small Business Administration shows an example statement that may help you build yours. Likewise, Google Sheets and Microsoft Office both offer free P&L statement templates.
Consider a small pizza restaurant with $100,000 in yearly sales. Between the restaurant’s ingredients, packaging, workforce, and other expenses, its COGS for a year totals to $7,000 in COGS. Here’s how the company’s P&L statement would look:
Sales: $100,000 - COGS: $7,000 = Gross profit of $93,000
Materials and packaging: $2,000 + Payroll: $20,000 + Insurance: $11,000 + Advertising: $7,000 = Total expenses of $40,000
Gross profit: $93,000 + Other Income: $5,000 – Total expenses: $40,000 = EBITDA of $58,000
EBITDA: $58,000 - Taxes, loans, depreciation, and amortization: $3,000 = Net profit of $55,000
Once you’ve gotten into the habit of creating monthly, quarterly, or annual P&L statements, you’ll be able to monitor your company’s net profits or losses over time to help you better understand your company’s financial health and how you can adjust course for the long-term.