Do you want a better understanding of your business’s financial health? A profit and loss statement is the key to being able to make good decision, grow your business, and ensure success.
As a business owner, one of the most important tools for monitoring financials is a profit and loss statement, also called a P&L statement. This statement provides an overview of your business’s revenues, expenses, and profitability over a specific period.
Whether you’re running a startup or managing a seasoned business, mastering the P&L statement is important for your business. Let’s look at how to create a profit and loss statement, interpret it, and apply the knowledge.
What is a profit and loss statement?
A profit and loss statement summarises revenue and expenses during a specified period, usually a quarter or a year. You start with revenue and then subtract the costs of doing business, such as operating expenses and taxes, to calculate the net profit or loss. The net profit or loss is also called the bottom line.
How to set up a profit and loss statement
- Look at all your revenue sources to estimate your total income, such as the sale of goods and services.
- Calculate the production costs, which includes all expenses directly associated with the production of the goods or services your business sells.
- Deduct operating costs from your total revenue to find your gross profit.
- Calculate operating costs, such as rent and utilities, marketing costs, and employee salaries.
- Deduct operating costs from gross profit to reach operating profit.
- Include any other income or expenses, such as investments or interest.
- Calculate your net profit or loss by taking taxes into account.
The resulting figure will show if your business is profitable or not during the chosen period.
Download a free profit and loss template.
How to interpret a P&L
Interpreting a P&L statement involves looking beyond the numbers to understand the story they tell about your business:
Revenue: Assess whether sales figures are growing or declining over time.
Gross profit: Consider the margins and whether you have sufficient liquidity to cover operating expenses.
Operating expenses: Look for areas where you can reduce costs.
Net profit or loss: This final figure tells you if your business is profitable or operating at a loss.
See also: How to make a budget
Profit and loss statement for small businesses
For small businesses, it is an invaluable tool for tracking performance, identifying downwards or upwards trends, and making good business decisions. It helps you to key in on areas of your business that can could perform better, such as places where you can reduce costs or times when you need to increase sales revenue.
You might, for example, shorten your payment terms to receive payment from your clients quicker.
Pro-tip: Cut costs with free invoicing
With free invoice software you can reduce your costs. Send an unlimited amount of invoices to your clients, either from your laptop or phone.
Get notified about overdue payments so that you can follow up with clients and improve your revenue.
Profit and loss statement for freelancers and contractors
Freelancers or contractors will find it particularly useful for reporting business income as part of the tax return. It also helps you gauge the viability and sustainability of your work.
Whether you’re a small business owner, a freelancer or a contractor, understanding how to create and interpret a P&L statement is essential to manage your finances. With a P&L statement, you can evaluate your profitability, make good decisions, and set yourself up for long-term success.
