How to Make a Profit and Loss Statement
Creating a profit and loss statement can give insight into how your small business performs financially. Follow our guide to find out how to prepare one for your company.
As a small business owner, it’s important to keep track of what’s coming in and going out. That is, how much you’re making versus how much you’re spending. To make a profit, your incoming expenses must exceed your outgoing expenses, and if they don’t, then you’re looking at a loss.
To determine if your small business is experiencing a profit or loss at any given time, you can use a profit and loss statement (P&L), otherwise known as an income statement. Essentially, it’s a table that lets you plug in your revenue, costs, and overhead to measure your overall business expenses, so you can assess your performance, see trends, and create forecasts.
If you’re using accounting software like QuickBooks, the program will automatically spit out a small business profit and loss statement for you. But creating a profit and loss template from scratch is easy if you tracking your expenses.
Follow our guide on how to make a profit and loss statement to build your P&L for your small business, and take advantage of the answers to your FAQs below.
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How to Make a Profit and Loss Statement
To make a small business profit and loss statement, you’ll need to calculate the following aspects to determine the difference between your company’s income and expenses. Follow these simple steps to arrive at your net profit/loss.
#1
Select the Given Time Period
A P&L lets you see a snapshot of a specific period, so decide what time frame you’d like to track, such as a particular month, six months, or even a year.
You’ll want to track your expenses regularly to compare one period to the next to get the complete picture.
#2
Calculate Your Revenue
Now, determine how much revenue you made for that set period. Your revenue is the total amount of money you earn from your products or services, so tally up all the payments you’ve collected during that time.
#3
Determine Your Cost of Goods
Next, add up your cost of goods. The cost of goods refers to how much money it takes to produce your products or services.
For your products, the cost of goods includes the price of the supplies and materials and the time it took to make them. As for your services, it covers how much it costs to provide the service, such as your hourly rate.
#4
Figure Out Your Gross Profit
The next step involves calculating your gross profit, which is your adjusted income, after removing your cost of goods. To arrive at this number, subtract your cost of goods from your revenue.
#5
Obtain Your Operating Profit/Loss
As a business owner, you know running a business costs more than just what it takes to produce your products or services. You’ve got various other expenses to cover, from keeping the lights on to paying your rent. In this portion of your P&L, you'll add up all expenses related to your business (also known as overhead).
Some examples of these expenses might include:
- Rent
- Utilities
- Administrative costs
- Equipment fees
- Payroll
- Advertising fees
- Insurance
Some of these costs you may pay every year, like salaries, in which case you’ll need to determine what they cost for the specific time frame you’re working with. For example, if you’re calculating the last six months, divide the yearly value by two, but if you’re looking at a particular month, divide the value by twelve.
Once you’ve tallied these expenses, subtract them from your gross profit to determine your operating profit/loss.
#6
Find Your EBITDA
Now you’ll look at income interest and dividends your business has earned. If that applies to your company, add those to your operating profit/loss. This will give you your earnings before interest, taxes, depreciation, and amortization, also known as EBITDA.
#7
Arrive at Your Net Profit/Loss
You’re almost done! This last part involves adding up any interest payments, taxes, depreciation, and amortization associated with your company.
From here, you’ll subtract that value from your EBITDA to determine your net profit/loss.
If this value is positive, that translates to a profit or gain. But if it’s negative, then that’s a net loss, and your business has taken a financial hit during that time frame.
Calculating your net profit/loss helps you assess your business’s financial health. If you run these calculations monthly or quarterly, you can compare each report and begin to recognize trends. For instance, maybe your numbers dip each winter. So, what gives?
By looking at each factor, you can explore what might influence your gains and losses. Furthermore, you can adjust your numbers to make projections and predictions to help you prepare for the future.
FAQs
Yes, an income statement is just another world for a profit and loss statement or P&L.
There is no difference between the two, as they’re two words for the same template that looks at a business’s revenue, costs, and expenses to reveal profits or losses for a specific time period.
Excel features a P&L template that makes it easy to plug in the relevant values. To begin, download the free template. It should automatically open in Excel, where you can save a new version and place your values into the appropriate fields. However, you can customize your own Excel table using basic Excel formulas.
You can create a profit and loss statement for free using the above calculations.
A P&L helps you monitor your company’s profits and losses to help you better understand its financial health during specific periods.
Many programs will provide a profit and loss template for you, including QuickBooks, NetSuite, OnPlan, Divvy, and Jedox.
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