How to Do a Profit and Loss Statement for a Small Business

A Profit and Loss (P&L) statement, also recognized as an Income Statement or Statement of Operations, provides a financial overview of a business’s performance over a specific period. This document summarizes the revenues generated and the costs and expenses incurred by a small business. Its purpose is to illustrate whether a business has made a profit or incurred a loss during a given timeframe, such as a month, quarter, or year. Understanding the P&L statement allows small business owners to assess their financial health and track their progress over time.

Understanding the Core Elements of a P&L

A Profit and Loss statement is structured to present a clear picture of a business’s financial journey, moving from top-line earnings to the final profit or loss. Each component contributes to this comprehensive view, highlighting different aspects of financial performance.

Revenue, often called the “top line,” represents the total money a business earns from its primary activities, such as selling goods or providing services. This figure encompasses all income generated before any expenses are deducted.

The Cost of Goods Sold (COGS) includes direct costs tied to producing the goods or services that were sold. These are variable costs that fluctuate with production volume, such as raw materials and the direct labor involved in manufacturing.

Subtracting the Cost of Goods Sold from revenue yields Gross Profit, which indicates the earnings remaining to cover operating expenses and generate further profit. This metric helps assess how efficiently a business manages its production-related costs.

Operating Expenses are the costs necessary to run the business, but they are not directly linked to the production of goods or services. These can include rent, utilities, employee salaries (not directly involved in production), marketing, and office supplies.

Operating Income, also known as Earnings Before Interest and Taxes (EBIT), is calculated by subtracting total operating expenses from gross profit. This figure reveals the profitability of a business’s core operations before accounting for financing costs and taxes.

Non-Operating Income and Expenses arise from activities outside the business’s primary operations. Examples of non-operating income might include gains from selling an old asset, while non-operating expenses often involve interest paid on loans, or losses from investments. These items are separated to provide clarity on core business performance.

Net Income, or the “bottom line,” is the profit or loss remaining after all revenues and expenses, including non-operating items and taxes, have been accounted for. This figure represents the true profitability of the business for the reporting period.

Gathering Your Financial Information

To construct an accurate Profit and Loss statement, a business owner must first gather all relevant financial information. This involves collecting documents detailing every financial transaction within the chosen reporting period.

Sales records form the foundation of revenue calculation. These include sales invoices, cash register receipts, and reports from e-commerce platforms. Bank deposit slips also serve as a cross-reference for verifying incoming revenue. Maintaining organized sales data ensures all earned income is captured.

For businesses that sell products, Cost of Goods Sold (COGS) records are essential. This requires tracking supplier invoices for raw materials or inventory purchases, along with direct labor payroll records for employees directly involved in production. Accurate COGS tracking ensures the direct costs associated with sales are correctly accounted for.

Expense records document all operating costs. This includes vendor invoices for services or supplies, utility bills, rent receipts, and payroll records for administrative staff. Credit card statements and receipts for business purchases are also vital for capturing all outflows.

Bank and credit card statements are for verifying transactions and reconciling accounts. Regularly reviewing these statements helps identify discrepancies, unrecorded transactions, or potential errors, ensuring the accuracy of financial records. These statements provide a comprehensive overview of money flowing into and out of the business.

Leveraging accounting software can streamline data gathering. Such software can integrate with bank accounts and other financial systems to automatically import and categorize transactions, reducing manual data entry and improving accuracy. This automation ensures real-time updates and provides a more efficient way to prepare financial statements.

Building Your Profit and Loss Statement

With the necessary financial information gathered, assemble these figures into a structured Profit and Loss statement. This process systematically organizes revenues and expenses to reveal a business’s profitability.

First, choose a specific reporting period for the P&L statement. This period can be monthly, quarterly, or annually, depending on the business’s needs for financial insight. Consistency in the chosen period allows for meaningful comparisons over time.

Once the period is set, all revenues earned during that time are listed and summed. This includes all income from sales of goods or services, whether from cash transactions or invoices. Businesses often categorize revenue streams to provide a more detailed understanding of where income originates.

The Cost of Goods Sold (COGS) for the period is calculated. This calculated COGS is then subtracted from the total revenue to arrive at the Gross Profit.

Operating Expenses are categorized and totaled. Sum all costs incurred to run the business that are not directly tied to production, such as rent, utilities, salaries, and marketing expenses. These expenses are typically listed below the gross profit section.

Subtracting the total operating expenses from the gross profit yields the Operating Income. This figure highlights the profitability of the business’s core operations before considering non-operating items or taxes. It provides a clear view of how efficiently the business is managing its day-to-day activities.

Any non-operating income or expenses are accounted for. Non-operating income, like interest earned on a business savings account, is added, while non-operating expenses, such as interest paid on loans or losses from asset sales, are subtracted. These are usually presented separately to maintain clarity about core operational performance.

The final calculation determines the Net Income, or the “bottom line,” by adjusting the operating income for non-operating items and taxes. This represents the business’s total profit or loss for the chosen period after all expenses have been deducted.

For clear readability, the P&L statement should be formatted with clear headings, subheadings, and consistent labeling. Using a simple, uncluttered layout, whether in a spreadsheet or accounting software, ensures that the financial information is easily digestible and understandable.

Using Your Profit and Loss Statement for Business Insights