- What’s a profit and loss statement?
- Why is a profit and loss statement Important?
- Section by Section Guide
- Sample Template
- Analyzing Your profit and loss statement
What’s a profit and loss statement?A profit and loss statement is sometimes called an “Income Statement,” “Revenue Statement,” “Operating Statement,” or “Statement of Financial Performance.” These are all different terms for the same thing. But what does the profit and loss statement actually do? The profit and loss statement shows a business’s revenue, expenses, and net income over a period of time. Usually, the statement is made quarterly and annually, but some companies also prepare it monthly. There’s no single correct template for a profit and loss statement, but we’ll provide a generalized one down below. Know that the length of the document is dependent on the size of the company. Small businesses are bound to have shorter statements, while larger companies will have longer ones.
Why is a profit and loss statement Important?profit and loss statements are important because they help business leaders determine if a company is trending toward profitability or losses. Because the statement thoroughly lays out income and expenses, business owners can easily identify where changes need to be made to boost revenues or cut costs. If you own a small business, a profit and loss statement can answer a few important questions for you:
- Can I afford to hire a new employee?
- Can I afford to move to a bigger office?
- How should I plan my taxes?
- Is my current growth strategy effective?
Section by Section GuideNowadays, many small businesses use bookkeeping services to prepare their profit and loss statements. But you should still know how to read and interpret each section of the document. Let’s review the profit and loss statement section by section.
1. RevenueThis one’s easy. The Revenue section details the total income that your company makes. It lists all the revenue generated by:
- Money received by selling assets
- Money received from tax refund
2. Cost of Goods Sold (COGS)If your business sells a product, chances are the product isn’t free to manufacture. Let’s say, for example, that your company manufactures fidget spinners. For every fidget spinner you produce, you have to pay for the materials, labor, and machinery to make it. You manufacture them in large batches, which saves money, and ultimately you pay about 30 cents for each one. The Costs of Goods Sold (COGS) section details these types of manufacturing expenses. They’re important to list because they detract a small portion from the revenue you gained by selling your product. COGS is not exclusive to retail sales. If you own a restaurant, you probably have to pay for the food that you cook—what you pay for ingredients would be listed in the COGS section.
3. Gross ProfitTo calculate your company’s gross profit, subtract COGS from Revenue:
- Revenue – COGS = Gross Profit
4. Operating Expenses (OPEX)The Operating Expenses (OPEX) section totals the costs of running your business that aren’t related to COGS. Operating expenses include:
- Building Leases
- Equipment Purchase
- Hardware and Software
- Cell Phone and Internet Service
5. DepreciationYour company might own a variety of assets, like a building, vehicles, or equipment. Most assets generally depreciate over time. In the Depreciation section, you state the loss in value of all company assets. This section is usually only included on annual profit and loss statements. Depreciation can be important for taxes—but how do you calculate it? If you want to maximize your tax savings, we highly recommend using a small business tax service. Taxes are a complicated field and can be a major burden on smaller companies, but tax professionals will do the heavy lifting for you.
6. Earnings Before Interest and Tax (EBIT)Calculate your Earnings Before Interest and Tax (EBIT) by subtracting Operating Expenses from Gross Profit:
- Gross Profit – Operating Expenses = Earnings Before Interest and Tax
7. Earnings Before Tax (EBT)Calculate your Earnings Before Tax (EBT) by subtracting COGS, OPEX, interest, and depreciation from your revenue:
- Revenue – COGS – OPEX – Interest – Depreciation = Earnings Before Tax
8. Earnings Available for Common ShareholdersThis section shows your company’s total profit after taxes (if you’re going to be filing your own taxes, be sure to take advantage of our small business tax form library). If your business has investors, this is the money that can be used to pay out dividends to shareholders. You don’t need to include this section if your business doesn’t have investors.
9. Owner’s DrawThis section states the business owner’s salary. This salary comes out of company revenues.
10. Net IncomeAt last, we reach the Net Income section. This is the proverbial “bottom line” that’s talked about so often in business—it’s literally the bottom line of the profit and loss statement, and it’s inarguably the most important line. Net Income states the total quarterly or annual profit of the company, having accounted for expenses, taxes, and all total revenue. Ideally, you want your Net Income to be as high as possible.
Analyzing Your Profit and Loss StatementAfter you’ve prepared your profit and loss statement, you should analyze it and use it to create new business strategies or change existing ones.
What if my company made money?Even if your company made a profit, you should still analyze the profit and loss statement. Your goal as a business leader is to do what you can to boost your company’s profitability. You might view the Operating Expenses section and find areas where you can easily cut back costs. Or maybe you’ll realize that your company isn’t making the most out of its tax savings, and you can work closely with tax professionals to prepare for tax season. If your company made money, you’ll also have to decide what to do with the profits. Some of your options include:
- Re-investing the money
- Saving the money (“rainy day” funds)
- Boosting salaries or granting bonuses