If you are running a business, be it of any kind, you must already know that a profit and loss statement is the heart of a business. It's a financial report that helps a company understand whether their business is in loss or profit. If it is in loss, it gives you a chance to know where you are going wrong and figure out ways to convert your losses into profits. And if you are in profit already, it encourages you to do even better and reach greater heights.
For a business and to maintain proper accounting, profit and loss statements are everything. A business's main objective is to be financially solvent, and having a profit and loss statement every month gives you a clear picture of the same. A profit and loss statement is also called a P&L statement and if you want to understand what a P&L statement template is and how to prepare it, keep reading this guide because you will find all your answers here.
What is a Profit and Loss Statement?
Before exploring simple P&L statement templates, it is crucial to know what a profit and loss statement is in the first place. A profit and loss statement is commonly referred to as an income statement. It's a document that helps you check your business's expenses and measure the revenues for a certain period of time.
Simply put, a profit and loss statement is a document that tells you whether your business is in profits or losses. Although profit and loss statements are critical for every business, it is a mandate for small businesses because only on the basis of a profit and loss statement you will get to know all things you need to do to make your business profitable in case it is in a loss.
Now, profit and loss statements can be assessed annually, quarterly, and monthly. Please note that not every P&L statement will look the same. Some can be complex comprising multiple pages, and others can be simple with only a few lines. Now that you have understood what a profit and loss statement is, you might wonder how to create a P&L statement.
Profit and Loss Statement Format
If this is your first time working on a monthly/annually/quarterly P&L statement template, you might encounter a few challenges without understanding the critical components you must add. Let's walk you through the components that will help you understand this better.
Revenue
Every profit and loss statement will have a significant component called revenue. Your P&L statement will have the revenue statement as well. Revenues that your business generated from sales.
Expenditure
As a business, you will have some expenditures as well. Any kind of expenditure that your business is spending on needs to be added.
Direct Costs
Direct costs mean any cost that is related to a product or production of sales. This can be material cost, labor cost, manufacturing cost, etc. If you don't manufacture things in-house and buy them from a supplier, that needs to be added to direct costs.
Gross Profit
Your gross profit will be based on a simple calculation.
Revenue - Direct Cost = Gross Profit
Typically, you will have to mention the gross margin. So, to calculate gross margin, you need to do the following:
Gross Margin/Revenue = Gross Margin %
Operating Costs
Your business will have operation costs, such as payroll, rent, office supplies, insurance, utilities, admin costs, advertising costs, etc.
Depreciation
Depreciation will be when the value of assets related to a business reduces, such as equipment and machinery.
Earnings Before Interest and Tax
A P&L statement has something called EBIT, earnings before interest and tax. This will be towards the end of a statement. To calculate this, you need to subtract the operating cost and cost of goods.
Earning Before Tax
Earnings before tax are essential to determine how well your business has performed. To calculate this, use this simple formula:
Subtract Cost of Goods + Operational Cost + Depreciation from your business's total revenue.
Net Income
This is the part which tells you whether your business is in profits or loss. To calculate the net income, you must subtract the indirect expenses (anything other than business expenditure) from the gross profit.
This will be the bottom line, which clears the picture of your business.
How to Create a Simple P&L Statement?
It is pretty apparent that you will want to create a P&L statement that you and your finance team understand. As you have understood by now that a P&L statement can tell you about your company's weaknesses, strengths, and performance, which means creating a robust P&L statement is critical.
A P&L statement will have two crucial components, which you need to fill carefully: income and expenditure. Income is what comes in, and expenditure is what goes out.
Income can be sales, revenue, interest income, rental income, and services fees. And expenditure can be costs of goods sold, salaries to employees, insurance coverage, taxes, rent if you are renting the business property, and interest on business loans (if applicable).
To start creating, you will have to prepare a spreadsheet, which will have all the relevant information. Keep the data handy so that you know where to find the information when you start preparing the balance sheet. Once ready, here's what you need to do:
1. Think of the time frame. You can prepare monthly, quarterly, or annual P&L statements.
2. Whatever time frame you choose, list revenues first. If you are preparing quarterly or annual reports, break down monthly revenues.
3. Now, start calculating the expenses. Make sure you segregate expenses as costs of goods and operational costs.
4. Once done, you need to figure out the gross profit amount, subtracting the direct costs from revenue.
5. Check whether your company is in profit or a loss. To do this, subtract the total expense amount from the gross profit amount. If the number is positive, you are in profits; in case the number is negative, you are in loss.
Here's a sample P&L statement that you can refer to understand how it's done. You will see that the sample has every component that we talked about earlier. Some components may not be required, so create one as per your business revenues and expenses.
Conclusion
Remember that the profit and loss statement is essential for your business. It needs to be 100% accurate to evaluate how much you are at a loss or in profit. P&L statements are vital for a company to figure their profit and loss statement, and they will also be required if you have investors. They would also like to see the complete data to make further decisions. Also, if you thought that a balance sheet and P&L statement are the same, that’s not the case.
A balance sheet helps you identify your company’s liabilities and assets. And when it comes to P&L, it tells you about your company’s expenses and income in detail. It also tells you about the current status of your company. The figures you will add in a profit and loss statement must be accurate because if you make wrong entries, the result will be inaccurate. Whatever expenses are going out of your company, be it your personal expense, but in the company's name, you must add them too to see the accurate result. We hope this guide will help your business prepare a profit and loss statement without any hassle, and we recommend downloading the template that we have for you.