It’s always important to know how your business’ finances are truly functioning, even if you don’t have debt. Creating a profit and loss statement is a vital part of accounting basics every entrepreneur should know. Let’s explore the steps involved, so you can easily compile an income statement when requested.
How Often Should I Prepare a P&L Statement?
The time you choose in which to conduct a P&L statement relates to what’s best for your operations. What are the parameters set for reporting financial information to your non-profit board? How often do your investors like to see how their money is faring? Are you seeking additional partners/investors, or are you in need of a loan? Regardless, you’ll still have to prepare a statement at some point for taxes. Whether you opt for semi-annual, quarterly, monthly, or per annum, stick to a routine schedule. As with all other facets of record-keeping, it’s beneficial for everyone to know when a P&L analysis is due.
What Details Do I Need for My P&L?
Think back to when you had to determine how much money you needed to launch your business.
Those lists of supplies, equipment, and expenses weren’t just for one-time use. Chances are you kept them for accounting (or should have), and have updated them accordingly as operations progressed. If someone else oversaw start-up costs, refer to previous P&L statements for itemization, and to compare to the next review. When you create a new P&L, gather:
- Cash and credit receipts
- Payroll, including whatever you pay yourself
- Balances owed
- Sales, returns/refunds, and discounts
Steps to Create a Profit and Loss Statement
Once you have all of your paper and digital records, perform the following:
- Determine if you will use a software program, your own Google or Excel spreadsheet, or a pre-printed Microsoft template download. If opting for software, consider features such as future upgrades, free trials, access restrictions, and industry-specific designations.
- Make sure your title includes the business name, preparer’s name, and the dates that the statement reflects.
- Set up the key columns; Net Income or Sales, Expenses or Cost of Goods, Earnings, Taxes, and Net P/L. Note that earnings are what is left after costs/expenses get subtracted from income/sales and that this is a pre-tax figure. Estimated taxes are then deducted from the earnings, to result in either a conclusive gain or depreciation.
- Remember to define each itemization so that every reviewer understands what the money went towards or how it was gained. Be as detailed as possible, to help track the ensuing advantages or disadvantages that the finances represent. Say for example you run a cafe, and you changed coffee bean suppliers during the period under analysis. You could input “Coffee Bean Suppliers” with the total expense for that time length, and underneath sub-categorize each vendor’s amount. Or you could put each supplier as an entry, whichever format you prefer.
Benefits of Profit and Loss Analysis
Isn’t it redundant to prepare P&L statements, since taxes usually indicate whether a business is succeeding, breaking even, or needs improvement? Taxes don’t give you a comprehensive breakdown of how the profit or loss equates to each transactions percentage. Your statement provides direct insight into company financial health and coordinates with a balance sheet of liabilities and assets.
If you are unsure about adequately creating a profit and loss statement, contact a certified business accounting firm. They’ll guide you through the steps, and teach you how to use it as a measuring tool for your company’s future success.