Keeping track of your finances is essential if you’re a small business owner. But what is a profit and loss statement, and why do you need one?
A profit and loss statement is a document that shows your business’ income and expenses over a specific period of time. It can help determine whether your business is making a profit or not. You usually complete a profit and loss statement every month, quarter and financial year. In this article, we will explain what a Profit and Loss Statement is and how to create one for your small business.
How to create a profit and loss statement
Reviewing the financial state of your business regularly will help ensure your success and catch any areas of concern before they snowball. Creating a profit and loss statement is relatively easy, if you use an accounting platform such as Xero or Myob, you can create your reports with a click of a button under the reporting section.
If you are not using accounting software, there are many free templates available online to get you started. If you’re unsure about which template to use, search for one that is specific to small businesses to gain the most benefit from the information it provides. Completing these manually can be time-consuming and key information can get missed. When deciding whether to invest in accounting software, consider how much time you spend compiling reports instead of working in other areas of your business.
As your business grows, we recommend investing in an accounting platform so you can stay on top of your financial position across the entire year.
What information should be included in a profit and loss statement?
A profit and loss statement contains actual and sometimes forecasted figures related to sales, expenses, and profits. This statement provides a comprehensive overview of the business’s financial performance over a certain period.
Your line items will typically include the following:
- Total revenue gained from sales
- Any associated expenses to deliver those sales (cost of goods)
- Expenses such as wages and taxes
It allows you to gain insight into the net profit produced and understand your expenses. Reviewing this information is key for small business owners so that you can remain aware of your current financial standing, where you are making a profit, what products or services are not profitable, and that you have a return on your expenses. At the end of the day, knowing your position means you can make informed decisions when planning for the future.
How often are profit and loss statements calculated?
An accurate and timely profit and loss statement is one of the most important financial components of any small business. We recommend that you review your income and expenses monthly, quarterly, and yearly.
Many small businesses calculate their profit or loss monthly, which is good for showing a snapshot of the details for each month. However, it is also beneficial to establish a quarterly review as staff illness or seasonal factors can affect your monthly numbers, where a quarterly review helps to take a step back and make sure that your numbers are improving, even if you have a slow month.
An annual review is typically undertaken at the beginning of the calendar year or financial year and helps to set your business goals and budgets as part of your yearly business plan.
Reviewing regularly allows you to compare over time and better plan for the future. With accurate monthly, quarterly, and annual statements, you can ensure that your business remains profitable long-term.
Tips for making the most of your profit and loss statement
To make sure you’re making the most of your profit and loss statement, it’s important to keep accurate records and review regularly to identify potential trends, check prices frequently against competitors, and plan for upcoming seasonal fluctuations and peak times. Additionally, be sure to identify expenditures that are necessary to the long-term success of your business. By taking proactive steps such as these, small business owners can learn how to manage their finances more effectively and ensure their overall success for years to come.
Creating a profit and loss statement can seem daunting for small business owners if you are starting out or haven’t done one before. But having this information at your fingertips (and understanding the report) is invaluable. By understanding how to create a statement, what information should be included, and updating it regularly, you can use it to make informed financial decisions. If you have any queries regarding Profit & Loss Statements or setting up an accounting platform, we are here to help. Just click here to book an appointment with Amanda.