8 Easy Steps to Prepare a Profit and Loss Statement for Your Small Business

Jan 23, 2023

A profit and loss statement helps determine whether your corporation is making a living or running at losses.

Whether you run a small business or a big corporation, it’s necessary to trace your corporation’s financial progress at specific time intervals.

A business profit and loss statement helps you do this by summarising the revenue, expenses, and income over a selected period to supply a whole insight into the business’s financial position.

It helps you establish future projects, consider expansion and acquisitions, and make financial decisions.

Hence, in case you’re a business owner, you could know what a profit and loss statement is, tips on how to create it, and its uses for your corporation. Let’s start with the fundamentals.

What’s a Profit and Loss Statement? 

A profit and loss statement, also often called an income statement or statement of profit, gives you detailed information concerning the revenue and expenses of a business.

An easy profit and loss template takes includes money inflows and outflows of a business during a selected period.

It’s like a scorecard showing a business’s ability to generate revenue, manage sales, and create profits after covering all expenses. 

You’ll be able to make profit and loss statements monthly, quarterly, or yearly for higher insight into your corporation’s transactions.

Together with the money flow statement and balance sheet, a profit and loss statement can be a requirement that you simply present to investors and auditors.

Uses of a Profit and Loss Statement for Your Business

A profit and loss statement gives you an idea of your corporation’s strengths and weaknesses. It also enables you to determine several financial points of your corporation including the next: 

  • Determine whether the services and products you offer are drawing profits. 
  • Discover whether the business is getting in the proper direction. You’ll be able to do that by comparing multiple reports and analysing the performance graph of your corporation.
  • Deduce the general financial health of the business. Financers often search for the online profit of a business before making investment decisions. The profit and loss report helps paint a transparent picture of whether your corporation is making a living.
  • Provides visibility into gains, losses, and cost-saving opportunities by identifying areas that will not be performing well.
  • Lend greater ownership over the business’s funds, which helps the business remain fiscally viable over time.
  • Evaluate your corporation’s performance based on the proportion increase or decrease in income and expenses.
  • Discover accounting errors, omissions, discrepancies, or fraudulent activities.

If created well, the profit and loss statement might help make higher business decisions and save your corporation from losses.

The way to Make a Easy Profit and Loss Statement

You need to use accounting software or a template to make a profit and loss statement. You’ll be able to create reports monthly, quarterly, or yearly. 

Once you could have selected the time-frame, perform the next steps:

1. Calculate the Revenue

You begin by calculating all of the revenue your corporation gained in a certain period, as an example, 1 / 4.

Obtain these figures from current account balances, money, accounts receivable, and other components of your balance sheet.

READ: Your Ultimate Guide to Preparing a Balance Sheet for Your Startup

2. Calculate the Total Cost of Sold Goods

The associated fee of sold goods is a vital component of your profit statement. Include costs reminiscent of prices of raw materials, resource charges, worker wages, and some other costs applicable.

3. Determine Gross Profit

Calculate the gross profit by deducting the whole cost of sold goods from the revenue. If the quantity is available in negative numbers, it means you’re running a loss.

Gross Profit/Loss = Revenue – Cost of Sold Goods

The result’s the quantity your corporation has made or lost from selling its services or products over that period.

4. Deduce Operating Expenses

After calculating the gross profit, it is advisable to calculate all of your extra operating expenses, including rent, payroll, utilities, subscriptions, travel, equipment, etc. Add up all these expenses to reach at the whole figure.

5. Calculate the Operating Profit

Operating profit is the quantity you get by subtracting operating expenses from gross profit. 

A negative value here indicates an operating loss.

Operating Profit/Loss = Gross Profit – Operating Expenses

6. Add Additional Income

If your corporation makes any additional income you didn’t include in revenue, add that to the operating profit. Additional income may come from interests, investments, dividends, and other sources. 

Adding it to operating profit gives you the whole earnings of your corporation before paying taxes or taking depreciation and amortisation costs under consideration.

Total Earnings = Operating Profit + Additional Income

7. Calculate Taxes and Other Expenses

Calculate all additional expenses reminiscent of taxes, interest payments, depreciation, and amortisation expenses.

8. Determine Net Profit or Loss

Calculate net profit by subtracting all additional expenses within the previous point from total earnings. A negative value indicates a net loss for the business.

Net Profit/Loss = Total Earnings – Additional Expenses

READ: 5 Basic Steps in Preparing a Trial Balance for Your Business

Maximise Business Profits Now!

A profit and loss statement gives you a transparent picture of where and the way much your corporation is earning or losing by way of revenue.

An honest net profit amount indicates good financial health and a well-performing business, which attracts investors and boosts further growth.

To maximise your profits, make smarter decisions like selecting viable website hosting plans, registering a site from a reliable source, and saving money on cloud services.

Small steps could make an enormous difference in your corporation’s performance and annual profit and loss statement! 

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