One thing that you will likely have to do at some point as a business owner is creating a profit and loss statement. The purpose of this statement is to measure your business’s financial activity over a certain period of time, such as a month, quarter, or year. A profit and loss statement is also commonly referred to as an income statement, operating statement, or statement of revenue and expenses. Keep reading to find out more about profit and loss statements and how to create one.
A profit and loss statement comes in handy for many reasons. It can simply benefit you by showing how your products and services are affecting your business. You’ll be able to target problems regarding margins, expenses, and sales. It can also show your stockholders how net assets have decreased or increased. Forming a profit and loss statement also allows you to compare the recent year with past years and allow you to make an estimated forecast. It’s a smart business decision that can lead to smarter financial choices.
Each business will have unique statements, but these are the basic components of a profit and loss statement to give you an idea:
- Income: The money your business receives in payment for products and services.
- Fixed expenses: Costs that hardly vary, such as insurance, utilities, or rent.
- Controllable expenses: Including salaries, payroll taxes, advertising, supplies, subscriptions, maintenance, and legal fees.
- Net income before taxes: Your business’s income before taxed by state and federal governments.
- Taxes: If your business is a C corporation, then you will almost always be required to show income tax expense. Partnerships, LLCs, S corporations, and sole proprietorships usually don’t show this expense on their profit and loss statements.
- Net income after taxes: The final amount on a typical profit and loss statements, showing the total net profit during the period.
Preparing a profit and loss statement may be easier when you see a sample. Here’s an example of what a basic profit and loss statement looks like:
- XYZ COMPANY
PROFIT AND LOSS STATEMENT
FOR THE YEAR ENDING DECEMBER 31, 2015
Product sales: $______
Service sales: $______
Gross profit: $______
- Fixed Expenses
Total fixed expenses: $______
- Controllable Expenses
Payroll taxes: $______
Legal and accounting: $______
Total Controllable Expenses: $______
- Total Expenses: $______
Net income before taxes: $______
- Taxes: $______
- Net income after taxes: $______
Keep in mind that this is a sample and not a strict guideline to follow. Your business is likely to have additional information that needs to be included on your profit and loss statement.
Help for Fundraising
Another useful purpose of profit and loss statements is helping businesses with fundraising efforts. The majority of small businesses utilize some type of financing. If you’re looking for financing for expansions, real estate, inventory, equipment, or working capital, you’ll need to provide potential lenders with financial statements. It’s a smart idea to provide a potential lender with a profit and loss statement along with your tax returns and bank statements.
Hopefully the information and sample presented above will assist you in the process of developing your own profit and loss statement for your business. Creating statements like this can help you, your partners, your stockholders, and your potential lenders assess the financial activity of your business over a given time. You can create these statements monthly, quarterly, or annually, depending on the level of assessment you want. Operate your business with responsibility, integrity, and clarity by keeping track of your financial activity. Creating a profit and loss statement can help you keep your financials in check and apply for small business loans.
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