Financial Visibility: Profit and Loss Statements Explained
“Did I make money, or not?”
“What is a P&L statement?”
These are tough questions for anyone who runs a business. However, if you want your business to be successful, determining profitability is critical. This is where profit and loss statements come in.
What is a Profit and Loss Statement?
The profit loss statement is a financial statement that summarizes the revenue, costs, and expenses during a specific period, as defined by Investopedia. This is one of three core financial statements, the other two being balance sheets and cash flow statements.
Why Do I Need a Profit and Loss Statement?
Knowing your profit and loss over time is a bedrock of good business practice. By maintaining a profit and loss statement at various intervals (quarterly and yearly), you can track how your business performs by determining what transactions and sections of your business bring in the most revenue, and what expenditures are taking money away from your bottom line.
P&L statements are also essential for tax preparation and internal accounting for your business.
How is a Profit and Loss Statement Structured?
Profit and loss statements are usually prepared in two sections. To fully explain, we’ve provided an example from a seller of novelty clown masks. The first section shows income, and the second shows expenses.
Clown Mask Sample Profit and Loss Statement for the year ending 12/31/2020.
% of total income
Sales from products (clown mask sales)
Other income (interest income from cash on hand, investments, endorsements, and partnerships, etc.)
Celebrity clown endorsements
Travel & meals
Mask creation supplies
Profit and loss statements are at their heart rather simple. Any complexity usually comes in the itemization on the statement.
What Else Should I Know About Profit and Loss Statements?
There are a few things about P&L statements you should keep in mind.
First, as part of setting up your books for a new business, you’ll need to prepare a P and L statement with projected income for your business. Since this is just a projection, this isn’t used for taxes. These projected P&L statements are usually part of business plans and investor information for startups.
Secondly, it’s also smart to categorize various kinds of income and expenses on your P&L statements so that it’s easier to identify profit and loss centers for internal accounting.
In addition to keeping accurate profit and loss statements, it’s important to perform scenario planning for your business. With scenario planning, you can identify and analyze ways to forge the best financial future for your company.
What Isn't Shown on a Profit and Loss Statement?
Usually, assets and liabilities that aren’t related to the operations of the business are kept off of a profit & loss statement. If there are large outstanding loans or income-producing assets that don’t impact the day to day of the business, these go on the balance sheet instead. Administrative expenses also do not go on a P&L statement.
How Do I Prepare a Profit and Loss Statement?
There are several online templates that will enable you to list out the various information that you need to assemble your P&L statements. Items that are essential include:
- Bank statements with transaction listings.
- Payroll records that detail labor expenses.
- All receipts from transactions. Make sure to detail whether or not these are petty cash expenses, equipment costs, expenses for professional services and advertising, etc.
- Any records that detail reduction to sales, such as discounts and refunds.
Then take these steps:
- Show your business net income (usually labeled “sales”) for each quarter of the year.
- Itemize your business expenses for the period. Show each expense as a percentage of the sales number. When you are done, each of your expenses should add up to 100% of sales.
- Show the difference between sales and expenses as earnings. This is often called EBITDA (earnings before interest, taxes, depreciation, and amortization). With our sheet above, we’d subtract $250,000 (our sales) from $105,100 (our earnings) to show a EBITDA of $144,900. After this, we subtract interest on business debt, list taxes on net income, and show amortization and depreciation. Voila! You have your net earnings for the year, after taxes.
Let Synario Help
At Synario, we’re creating intelligent financial modeling software solutions that help business owners understand what is happening with their business. Financial models created in Synario can automate the production of forward-looking profit and loss projections.
Our integrated profit and loss statements are directly connected to your financial analysis. Add in projects or initiatives and watch as your profit and loss statements adapt to your updates; all within the same financial model.
We’d love to answer your questions about forecasting profit and loss. Contact us to learn more.