Even if you don't need to take out a loan to fund your small business, you’ll need up-to-date financial statements to guide you, help you make business decisions, and assist you in setting goals.
One of the most important financial statement any business needs is a profit and loss statement (called a "P&L"), also called an income statement.
Calculating the profit and loss of your business help you make decisions.
Another important reason to prepare a P&L statement is because it is required by the IRS. It’s the record of a business’ operation that is used to assess taxes on profits earned. A P&L is the only financial statement required by the IRS.
P&L statements help you project sales and expenses. Accountants and investors study a P&L statement carefully, scrutinizing cash flow and debt financing capabilities. According to Investopedia, along with the balance sheet and statement of cash flow, an income statement forms the backbone of basic accounting analysis.
Review your profit and loss statement regularly, at least every quarter. For more about small business taxes, review:
A new business needs to create a profit and loss statement at startup. This statement is created pro forma, meaning that it is projected into the future. Your business will also need a pro forma P&L when applying for funding for any new business project.
Most numbers for this statement comes from your first-year monthly budget (cash flow statement), and from estimated calculations on depreciation from your tax advisor. Specifically, you will need:
If you are using business accounting software, the profit and loss statement should be included with the standard reports. Even if you have this report in your system, you should still know what information is required to prepare the report.
Here are calculations to understand when preparing your P&L statement.
Revenues – expenses = net profit.
P&L statements generally follow this format:
Revenues
– Operating (variable) expenses
= Gross profit (operating) margin
– Overhead (fixed expenses)
= Operating income
+/– Other income or expense (non-operating)
= Pre-tax income
– Income taxes
= Net income (after taxes)
These categories are defined as:
The SmartBiz Small Business Blog has additional resources you need to run a profitable and successful business. Visit these links for more information: