By: First Union | Date:
What is a Profit and Loss Statement?
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Generally, when going for business loan financing you will need to turn in several financial statements to the lender. And even if you are not currently looking to procure a loan, such financial statements are always important to have on hand and up to date. One of the more important ones that every small business needs: a profit and loss statement, also known as a P&L. This shows all of the company's revenue and expenses over a given period. In this article, we will look at what a P&L entails, how you go about preparing one and why it is most definitely helpful for a business to have such a statement.
When Should You Prepare a Profit and Loss Statement?
Most small businesses will prepare a profit and loss statement for every quarter. You will also likely prepare a yearly statement. In keeping track of all revenue and expenses, the P&L will show the net income for that period—be it quarterly, monthly, or annually. So in other words, the profit and loss statement shows you exactly how profitable the business was, or consequently, how much it might have lost. When filing your business taxes, this form will be used to help calculate what income tax you will pay based upon how much the company made.
If you are a startup, your P&L will be a little different. You will be creating what is called a pro forma profit and loss statement. As you do not yet have revenue or expenses per se, yours will be based upon future projections for the company. This is going to be an important statement particularly if you are seeking funding in the early stages of the business.
What information do you need?
You will need your first-year monthly budget. Your cash flow statement and also the following:
- A list of all transactions within the business checking account. Additionally, if you and/or your employees using a business credit card, you will also need a listing of those transactions.
- If you made cash purchases during the period in question, also list out those. And any other such transactions for which you have the receipts.
- In terms of calculating your income, list out all sources of income for that time. Your bank statement should provide all relevant income information.
- And finally, if there were any discounts or returns, you need to account for those as well on your P&L.
Include Cash Transactions
If you are using business accounting software, as far as cash transactions go, you may have to manually input these. However, it is important to do so both on the income and expense side to have a comprehensive and accurate profit and loss statement. There are cash transaction forms that you can purchase and such can be used in terms of a customer-related transaction. Save any receipts involving your cash transactions for your records.
Preparing A Projected Profit and Loss Statement
Essentially with a pro forma P&L statement, you are making educated guesses regarding the revenue and expenses your business could potentially see. These types of statements are generally done for each month of your first operating year. If you do use it to go for business funding, the lender may ask you to project even further until you reach what you estimate to be the break-even point of the company. On this pro forma statement, you will include the following:
- Any expenses that you can envision having to pay out for. Be on the safe side here and overestimate that number so that you are not caught off guard at any point. Also, have a section for miscellaneous expenses that you might not have thought of.
- You are going to need to project monthly sales on this pro forma profit and loss statement. Unlike with the expense side, here you will want to underestimate. And also factor in more time than you think for bringing in that income. The difference between the two should be a negative number as is usually the cases for most firms just starting; this will also give you a good idea of how much you may need to borrow.
Preparing Your Actual Profit and Loss Statement
Your P&L statement will be divided into rows. For each, you will have a break down showing the quarterly amount and then a total income (if the company did have profit/) for the year.
- First off, you will list your business's net income. This will generally fall under "sales." If you do have income coming from other sources, you can break it down further and specify exactly where that money came from.
- You of course will then need to input all of your expenses for the quarter. It is important, especially when it comes to tax time, for these to be itemized. You will want to show the expenses as a percentage of sales.
- The difference between your expenses and your sales will be listed as earnings. Some people refer to this using the term EBITDA (earnings before interest, taxes, depreciation, amortization/).
- You will then subtract from EBITDA the interest paid on any business debt for the year.
- Also, subtract all taxes paid on your net income. Most of the time this will be estimated taxes.
- Finally, you will show depreciation and amortization for the year. This also gets subtracted.
- The resulting number is net earnings also called business profit—or loss as the case may be.
So Why Prepare a P&L Statement?
So what is the point of preparing such a statement and how can it help your company…First off, it gives management a big picture understanding of the company's finances and when it comes to making key decisions this is critical. If considering expansion, for example, looking at the profit and loss statement can certainly tell you whether or not you have the money to expand. And again, if you ever do go for business funding, a lender will ask for this to evaluate where your company stands as far as overall profitability. In other words, do you have the money to repay a loan?
First Union Lending works with small businesses across the country, getting them the funding they need to expand and thrive. If your company could use additional working capital, we can certainly help. Call today!