What is a Profit and Loss Statement?
As you are researching how to get your startup underway, you have doubtlessly heard about the importance of a profit and loss statement for self-employed business-people. Not too sure of what a profit and loss statement is? Not to worry. Profit and loss statements for small businesses, though they sound quite technical, are pretty straightforward.
A profit and loss statement (also known as an “income statement”) is a primary financial statement that small business owners use to assess their financial status. Profit and loss statements analyze how a business entity is performing over a specific period of time, typically monthly, quarterly or yearly. Income statements find the sum of a company’s expenses and revenue in order to find its net income during the time period under assessment. A company’s revenue is all of the income that the organization receives, including that from the sale of goods/services, rent, interest collected on issued loans and the sale of long-term assets. A company’s expenses are the sum of all that it spends on inventory, payroll, marketing, utilities and overhead, debt repayments and losses (due to asset damage or lawsuits, etc.).
The profit and loss statement, though it factors in many variables, is straightforward. It simply takes a look at your net income, piece by piece.
The “P&L statement” is an essential tool for startup companies because it helps the owner evaluate his/her company’s financial standing, as stated above. The statements help monitor growth and profitability during specific time segments. They also play an essential role in loss prevention, identifying overinvestment and other damaging business practices that can run startup companies into the ground.
Think of it as a “check-up” for your business. That established, every small business startup must learn how to complete a profit and loss statement. For some guidance, follow these steps.
How to Make a Profit and Loss Worksheet
1. Keep great records
First things first—you have to be a meticulous bookkeeper in order to make an accurate profit and loss statement. Make sure that you record each and every transaction throughout the month, quarter or year that you plan on analyzing. Store receipts and invoices, track your expenses on everything business-related and make sure that you have all of the relevant information that you need to give yourself an accurate snapshot of your financial standing.
2. Find a sample profit and loss statement on the internet
Before diving in to your own profit and loss worksheet, browse the web for some examples that others have done. It’s easy to find some good examples—just Google “sample profit and loss statement” and check out what comes up on the first couple of pages of results. It is helpful to see what the end product should look like. Also, most banks, like PNC, will teach you how to calculate each variable necessary in the document, for the sake of conceptualizing the math behind it all. It isn’t necessary, but if you’re curious, such things do exist.
3. Find a free P&L template to do the work for you
Sure, you could make your own profit and loss statement by hand with Microsoft Excel or Google Sheets, but save yourself the work (and the math). Use a free template that Microsoft or Google or a third party company has made for you. Profit and loss statement templates will calculate your total expenditures and income automatically. Check out some of these top-rated templates:
- Microsoft Office Profit and Loss Template—the Office template is great for 12-month profit and loss statements. If you have Excel (or Excel Online), give it a go. Also, as a bonus, Microsoft’s version of the income statement will sometimes draw a nifty graph for you to visualize your financial status, if you have the updated version of Office.
- Google Sheets Profit and Loss Template—while simpler than its Microsoft counterpart, the Google version of the income sheet gets the job done. Unlike the Office template, which requires that you have first purchased Excel, the Google version is totally free to use anywhere with an internet connection.
- QuickBooks Resource Center—QuickBooks is one of the many financial agencies that have created some simple templates to use.
You can find and tweak any template that suits you—just make sure that it comes from a reputable source. Microsoft, Google and QuickBooks (the subsidiary of Intuit) are all trustworthy sources that will provide you with a comprehensive spreadsheet.
Once you’ve gotten your finished profit and loss statement from your template of choice, interpret the results. Identify which expenditures are really killing you, which practices are yielding the most profit, and what should be modified in order to ensure that your business maximizes its income. For advice on the startup process, check out the other articles of the Startup Series.