Knowing how to make a profit and loss statement is an important piece of knowledge every business owner must have.
A profit and loss statement is how a business owner knows if their company is moving in the right — or wrong — direction. Without it, business owners are blindly operating without any idea if they are generating profit or losing money each month.
If you want to run a successful, profitable business, you need to know how to make a profit and loss statement and how to analyze it to get insights.
We’ll show you how to do both.
What Is a Profit and Loss Statement?
A profit and loss statement, also known as a P&L statement or an income statement, is a financial report that offers a snapshot of a business’s financial performance. It summarizes a company’s revenues, costs, and expenses over a specific period of time and indicates whether the business has made a profit or incurred a loss.
Why Is a P&L Statement Important?
A profit and loss statement supports business owners in a variety of ways. In addition to offering a high-level look at the financial health of the organization, it:
- Informs decision-making. The data from a P&L statement can guide business owners to make decisions about spending, saving, introducing offerings, removing offerings, cutting costs, and so much more.
- Measures growth. Comparing P&L statements over different time periods allows business owners to see how much they have increased (or lost) revenue.
- Aids in financial forecasting. A profit and loss statement helps business owners with financial forecasting and managing cash flow.
- Helps secure funding. If a business owner wants to get a line of credit or bring on investors, a P&L statement gives banks and investors the information they need to decide if they should provide funding.
- Simplifies tax reporting. An accurate profit and loss statement is a great tool to help tax accountants get a jump start on both tax planning and completing tax returns.
Related: Want to Avoid Stressful, Sleepless Nights at Tax Time? Do This.
How to Make a Profit and Loss Statement
If you use software like QuickBooks to manage your bookkeeping, creating a P&L statement is as easy as generating a report (one of the reasons why CFO2U recommends setting up accounting software as an essential bookkeeping task.)
If you don’t have accounting software, you can manually make a profit and loss statement by following these steps.
- Determine revenue. Calculate the income from the sale of all goods or services.
- Determine cost of goods sold (COGS). Calculate expenses directly tied to producing goods or services.
- Calculate gross profit. Deduct the COGS from revenue to identify gross profit.
- Determine operating expenses. Calculate fixed expenses (such as rent, salaries, insurance, utilities, etc.) and variable expenses (marketing, commissions, etc.).
- Calculate operating income. Deduct operating expenses from the gross profit to identify operating income. Sometimes referred to as EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
- Determine other income and expenses. Calculate any other interest, taxes, depreciation, and amortization.
- Calculate net profit. Deduct your net other income and expenses from operating income to identify net profit.
How to Analyze a Profit and Loss Statement
A profit and loss statement tells a story about your business. It can help you see where you are, where you are headed, and how you can improve your path forward. Here are a few ways you can analyze a profit and loss statement.
Analyze revenue.
Review how your business brought in income, and look for ways to grow revenue.
- What products/services brought in the most revenue? How can you ramp up sales on those items?
- What customers brought in the most revenue? How can you sell more to those customers? How can you sell to new customers that are similar to existing customers?
- Did your revenue fluctuate over the year? What could have caused rises and dips in sales?
Pro Tip: To get richer insights from your P&L statement, convert numbers into percentages. This allows for a more proportional comparison and helps identify changes in expense ratios, margins, or revenue composition.
Analyze expenses.
On the flip side, review how your business spent money, and look for ways to save. Categorize expenses into operating expenses (the cost to run your business) and costs of goods sold (the cost of materials and labor to create products).
- How can you decrease operating expenses and reduce overhead?
- Can you increase profit margins by reducing COGS?
- Do your expenses align with your business budget?
Related: 8 Ways to Reduce Overhead in Your Business
Measure profitability.
The most important line on the P&L statement is the final line item. The “bottom line” shows whether the business has made a profit or not. A business in the red has more expenses than revenue, whereas a business in the black has more revenue than expenses.
While new and growing businesses may experience time periods in the red, a business needs to move the needle toward black if it wants to survive and thrive.
Related: 6 Steps to Increase Profit in Your Business
Compare time periods.
To gain more insights from a profit and loss statement, generate more than one report. Pull P&Ls from different time periods to compare financial metrics and identify trends.
- Compare the current year’s performance to the previous year’s to identify growth or decline in revenue, expenses, and profits.
- Break down the P&L into quarters or months to pinpoint seasonal fluctuations or specific periods of higher or lower performance.
- Highlight significant differences between periods if there’s a substantial increase or decrease in a particular expense or revenue stream.
- Use historical data from periods of time to make future predictions and set realistic goals for revenue, expenses, and profits.
Use Your P&L Statement to Guide Your Business Year-Round
A P&L statement is one of your business’s most important pieces of information. If you don’t know how to make a profit and loss statement, now is the time to learn.
Start creating financial reports that can offer insights into your business, guide your decision-making, and build a more financially sound and secure business.
If you need help making or learning from a profit and loss statement, we’re here to help. See how our monthly bookkeeping packages can get your books in order so making a profit and loss statement is as easy as clicking a few buttons.
Download our free guide to learn more about hiring a bookkeeper or schedule your free consultation to get started today.
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