How many times have you found yourself running errands about town, where you’ve noticed a new business seemingly pop up overnight? In the United States alone, nearly 625,000 small businesses start every year — pretty staggering, right? Given today’s online marketplace, many entrepreneurs don’t even need brick-and-mortar storefronts, putting small business ownership well within reach.
If you own a small business or you’re thinking about starting one, profit and loss statements can help you track your business performance, identify areas where you can grow, predict upcoming expenses, and potentially even help you get new financing to take your business to the next level.
Not quite sure how to create a profit and loss statement? Don’t worry, we’ve got you covered — let’s take a look at what you need to make it happen.
So, what is a profit and loss statement?
A profit and loss statement is an evaluation of how much money your business is making — consider it a financial health checkup for the state of your business. An effective profit and loss statement will take into account your operating expenses, business incidentals, and revenue gained throughout the year (or even quarterly).
If you’re new to small business ownership, creating a profit and loss statement can certainly seem daunting — but we promise you won’t need a TI-84 graphing calculator and a protractor. When tax season rolls around, you’ll want to know where you stand, how much money you’re bringing in, how much you’re spending running your business, and whether you’re covering your tax obligations.
By tracking your income and expenses, your profit and loss statement can help you guide your small business toward a successful future.
What a profit and loss statement can do for your small business
A profit and loss statement can be a huge help in growing your business. Here are just a few of the reasons you might want to put one together.
To track business performance
It may seem like a no-brainer, but the biggest impact a profit and loss statement can have for your business is simply showing you how things are going. You can use the information from a profit and loss statement to help you set your pricing strategy, to show you which of your various products or services are the most profitable, and to help you predict upcoming needs in your business forecasting.
To secure further funding
Additionally, a profit and loss statement is important to have if you’re trying to secure funding for your small business.
Whether you’re looking for investors or a small business loan, you’ll need solid financial statements to prove that your business is worth the risk. A clear outline of your business profits versus losses can highlight the strengths of your business operations and give lenders an accurate assessment of your finances.
To stay ahead of tax season
Staying ahead of your tax obligations is crucial for any successful business. Profit and loss statements can help you make sure your business is appropriately assessing your tax obligations. Even if your business is what’s known as a pass-through entity, meaning you’ll pay those taxes as part of your personal taxes, your profit and loss statement is an important part of that calculation.
How to create a profit and loss statement
Let’s take a look at how you can create your own profit and loss statement for your small business. Gather your financial documents and follow each step!
1. Calculate your total revenue
The first step in creating your profit and loss statement is to calculate your total revenue. Has it been a slow year? Maybe your seasonal sledding business is just waiting for the first snowfall. Even if you’re in the black and making money hand over fist, you’ll need to accurately gauge how much you’re bringing in on the goods or services you’ve sold.
Your total revenue includes all the money you’ve made by operating your business — it includes all your sales earnings before interest and taxes, but not loans. You can import those figures into an Excel spreadsheet to aggregate your data manually, or you can use an app like Quicken Home & Business to track your business finances and generate your profit and loss statements automatically
2. Determine your cost of goods sold (COGS)
Your cost of goods sold (COGS) refers to the money your business spent to acquire, create, and sell your products or services. If you’re selling baked goods, for example, your COGS includes things like the ingredients you use and your means of delivering them.
To calculate your COGS, there’s a basic formula. Start with your beginning inventory, add your purchases, and then subtract your ending inventory — this will equal the cost of goods sold. If the bakery started the month with 20 pounds of flour worth $10, and then bought another 10 pounds for $5, that’s a total of 30 pounds of flour worth $15. If it finishes the month with 15 pounds of flour left, that means it used the other 15 pounds, or half of the total, which is worth $7.50.
3. Add up your other expenses
The good news is that your business expenses are generally tax deductible — not just your cost of goods sold but other costs too.
Do you run marketing campaigns on social media? Business expenses. Hire a web designer to optimize your domain? That’s an operating cost, too. Paying your employees? Another cost of doing business. Depreciation of your assets? Yep, that too! These are all expenses business owners need to account for, and they all affect your bottom line.
Expense tracking is crucial — are you accounting for expenditures as efficiently as possible?
4. Figure out your gross profit
To figure out your gross profit, subtract your total expenses (including any cost of goods sold) from your total revenue. Remember, if this all feels overwhelming, there are apps that can help you manage your business finances and do most of this for you, like Quicken Home & Business.
5. Determine if you’re making a net profit or loss
Your net profit is what you get to keep after paying taxes on your gross profits. Remember, new businesses usually take around three years to start making money and operating in the black. In fact, many successful businesses start out as a side hustle until the business owner can earn enough to support themselves financially.
Want to learn more? These 5 money management skills lie at the heart of every successful business.
How to analyze your profit and loss statement
To learn about your business from your profit and loss statement, start with the income at the top. When you list out your income streams according to your different products and services, you can start to see how much money you’re making on each one. That gives you a feel for where you should spend your energy and where you might be leaving money on the table.
Then, look through your expenses. Is there anything you can cut back on? Is there room to start paying for that one app that would make your life easier?
Some business owners jump the gun a bit, paying for big-business services they might not need yet. Others have trouble getting off the ground because they don’t want to pay for the things they really do need to grow. A profit and loss statement lists it all out for you, so it’s a great place to start when you’re trying to evaluate your business operations.
Another great way to see the value of profit and loss statements is to generate them over different time periods. What did the statement look like last month? How about the month before? The more profit and statements you look at, the more comfortable you’ll get reading them and the more you’ll learn about your business.
Over time, those P&L statements will be a huge help in watching your business grow. If you keep good records, you can compare your growth, sales, and profit from day one, monitoring pain points or bottlenecks and even forecasting future growth.
Want to spend less time on your financials and more time running your business? Quicken Home & Business offers built-in reports you can run automatically.
Making your business work for you
Owning a business isn’t just a hobby — you pour your heart and soul into it because it’s your passion. When looking at the finances of your company, consider how you value your own time as well. In many instances, small business owners don’t pay themselves — especially in the first year or two of operation. If you need to make ends meet in your personal life while operating your own organization, your profit and loss statement can help you determine a reasonable salary for your efforts.
Need some extra cash to launch your business? Check out these 23 ways to make quick money.
Are there any other financial reports I might need?
Along with profit and loss statements, balance sheets and cash flow statements can also help you get a solid picture of your business’s finances. While these additional financial reports are ultimately necessary, they’re tougher to put together on your own.
If you want to take a deeper dive into your company’s financials, Quicken Home & Business can track your business income and expenses automatically and generate the reports you need with just a few clicks.
Passion over profit?
It’s no secret that people start their own businesses because they’re passionate about their craft. Record producers, artists, chefs — these industries can be lucrative for some and a pay cut for others. As long as you can keep operating your business and enjoying it, that’s real freedom in and of itself.
If your business hits a rough patch, remember that Apple was plummeting in the mid-80s and Steve Jobs was ousted, only to be rehired a decade later to dominate the market. Bankruptcy loomed for Adidas in the early 90s — now, you won’t find a soccer pitch without Adidas gear on it anywhere on the globe.
By running your financial reports regularly and keeping a close eye on your operations, you’ll be in good shape to react quickly to market changes and take advantage of new opportunities as they come along.
– Small Business & Rentals – Quicken + Simplifi Blog