Last Updated on May 31, 2023
Making a profit and loss statement (P&L) is one of the most important things you can do for your business. This document tells you how much money your company has made and lost over a specific time. It can also provide insights into your business’s financial health and help you make better decisions about where to allocate your resources.
If you’re not sure how to make a P&L statement, don’t worry. Keep reading for a quick overview of what this document tells you about your business and all the steps to create one.
What Is a Profit and Loss (P&L) Statement?
A P&L statement has into two sections: revenue and expenses. The revenue section shows how much money your company has earned, while the expenses section shows how much money you spent. This information can help you understand whether your business is making a profit or a loss.
For example, if your revenue is $10,000 and your expenses are $9,000, your business has made a $1,000 profit. On the other hand, if your revenue is $10,000 and your expenses are $11,000, your business has incurred a $1,000 loss.
A P&L statement can also tell you how much money your company has saved or invested. For example, if your company’s net income (profit or loss) is $1,000, it has saved $1,000.
Now that you understand what a P&L statement is and what it tells you about your business, it’s time to learn how to make one.
Step-by-Step: How to Write a P&L Statement
Writing a profit and loss statement isn’t too challenging once you know how to make one.
Determine the Time Period
First, determine how often you want to create a profit and loss statement. Some companies do one monthly, while others make one quarterly. There is no best practice here; decide what makes sense for you and your company.
Gather Necessary Documentation
The second step is to gather the necessary documentation. This includes all of your company’s financial information for the designated period. You will need to know your total revenue, expenses, and net income (profit or loss).
If you have a balance sheet, you can also use it to calculate your business’s total assets and liabilities. This information can help you understand your company’s overall financial health.
Calculate Business Revenue
Next, you need to calculate all revenue received by your business during the determined period. You’ll get this information from the documents you gathered in the previous step. It will come in the form of account balances from your ledger or the balances of your accounts receivable.
You’ll want to be sure all revenue received during the month is in monthly profit and loss statements. Even if you didn’t collect revenue for the month, be sure to indicate that on your profit and loss sheet. Comparatively, if you do a quarterly profit and loss statement, make sure you’re adding up any revenue received during that time.
As you calculate the revenue for the month or quarter, make sure to include any revenue your company received. It could be from services you provided or selling old equipment or furniture. All these transactions need to be part of your profit and loss statement.
Calculate Goods Sold
After determining your business revenue, you need to go over your cost of goods sold, which is a critical aspect of your profit and loss statement. For example, if you’re selling shoes, you’ll need to include the cost of getting the shoes from the manufacturer.
If you’ve decided to make your own shoes, the supplies and raw materials needed are part of your cost of goods sold. Service-based industries need to include the time employees spend providing said service in the cost of goods sold.
Calculate Gross Profit
Once you determine your revenue and calculate the total cost of goods sold, you’ll need to find your gross profit. This is the profit your business made from providing a service or selling a good. It’s simply subtracting your cost of goods sold from your total revenue. That’s all there is to it.
Here is the equation: Gross profit = Revenue – Cost of goods sold.
Calculate and Deduct Operating Expenses
Now you need to throw in your operating expenses. These are expenses required to keep your business up and running. Operating expenses include office rent, travel costs, payroll, utilities (water and electricity), or equipment.
After you’ve tallied up your operating expenses, it’s time to deduct them from your gross profit. This is known as your total operating profit and tells you the total operating profit or loss of your business.
It goes like this: Operating Profit = Gross profit – operating expenses.
Add Additional Income
At this time, you’ll add in any additional income for your business. This includes additional revenue from sources such as investment accounts. Include income or dividends from these accounts in your profit and loss statement.
After you’ve added this income in, you’ll have the total before interest, taxes, depreciation, and amortization. You may see this referred to as EBITDA.
Follow this equation: Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) = Additional income + Operating profit.
Determine the Amount of Interest, Taxes, Depreciation, and Amortization
Once you have your EBITDA, it’s time to tally up your taxes due, interest payments, depreciation, or expenses associated with amortization.
Calculate Net Profit
This is the number you’re looking for: your total net profit. Deduct any interest, taxes, depreciation, or amortization expenses your business has to determine your net income.
The formula looks like this: EBITDA – (Interest + Taxes + Depreciation + Amortization) = Net income.
What a P&L Statement Tells You About Your Business
Now that you know how to make a P&L statement, take a look at some of the information it can provide about your business:
- Total revenue: how much money your business has earned over a set period
- Total expenses: how much money your business has spent over a certain period
- Net income (profit or loss): how much money your business has made or lost over a specific period
- Savings and investment: how much money your business has saved or invested over a specific period
- Trends in revenue and expenses: This information can help you identify trends in your business’s revenue and expenses. For example, if your company’s revenue is consistently increasing, this is a good sign. Alternatively, if your company’s expenses are constantly going up, this could be a sign of financial trouble.
Now that you know how to write a profit and loss statement, you can use it to track your business’s financial health and make better decisions about where to allocate your resources. Keep in mind that it’s essential to update your P&L statement, so you have accurate information.
By tracking trends in your company’s revenue and expenses, you can make better decisions about allocating your resources. For example, if your company’s revenue is consistently increasing, this is a good sign. Alternatively, if your company’s expenses are constantly going up, this could be a sign of financial trouble. So, make sure to update your P&L statement regularly to have accurate information.