What is the definition of a profit and loss statement (P&L)?

Also referred to as an income statement, a profit and loss statement provides an overview of your company's financial performance during a given period. They include your company's revenues, costs, and expenses within this time period. While P&Ls can be utilized to generate financial performance data on your entire business, they can also be a handy tool to analyze specific parts, such as the profitability of one product, the losses you encounter by hiring a new team member, or the costs of a specific project. They can also help you understand your business' strengths and weaknesses, so that you can make better strategic decisions.

What are the benefits of creating a P&L for your small business?

Like other financial documents, profit and loss statements can be utilized for a variety of purposes. If you need to apply for funding or loans from lenders, they will often require a profit & loss statement as part of the application process. In addition, profit and loss statements are useful when your business is seeking external investment (e.g., in the form of a debt or equity investment).

Profit and loss statements are also required for tax purposes. The government uses them to assess how much tax revenue your company owes. Finally, profit and loss statements are helpful in that they allow you to see at a glance how your business is performing. They can be used as a benchmark for when comparing subsequent profit and loss statements over time, whether it's in the same year or if you're analyzing revenue growth between years.

How can you create a profit and loss statement for your small business? 

There are a few different ways to create profit and loss statements, but the most common is to start with your company's revenue and expenses. You can find this information in your business' financial documents, such as invoices, bank statements, and receipts. Once you have gathered this data, you will need to calculate your company's profit (or loss) by subtracting your expenses from your total revenue. You can then create profit and loss statements in a few different formats, depending on the needs of your business or what is required by lenders or tax authorities.

The easiest way to manage this process is by either using a spreadsheet or managing within an accounting software such as Quickbooks.

How to Create a Profit and Loss Statement in Quickbooks

1. Locate the Profit and Loss Statement

Where you find the profit and loss statement (or income statement) depends on the version of Quickbooks you are using. Follow the instructions for the version you use.

Quickbooks Online Accountant

Easily find the profit and loss statement by typing 'profit and loss statement' in the search bar on the top right corner of your screen. Quickbooks will show you all the reports available to run and you can choose the format best fit for your needs.

Quickbooks Online

Click on the 'reports' tab on the left of the screen and scroll until you find 'profit and loss statement'. You can also use the search bar if you are having trouble finding it.

Quickbooks Pro, Premiere, or Enterprise Solutions

Click on the 'insights' tab on the top of the home screen. If you previously chose to display your profit and loss statement within your dashboard, it will be displayed here. To generate a more traditional profit and loss statement, head to the 'reports' tab in the toolbar at the top of the screen, select 'company & financial' and then choose the type of report you'd like to run.

2. Select the report format

Quickbooks has a few different report formats for profit and loss, all of which can be helpful in different ways. In general, if you are reporting for tax reasons, to get a loan, or acquire investors, a traditional profit and loss statement will do. If you'd like to run a profit and loss statement to get a better picture of your business, try using formats like 'profit and loss by customer' or 'profit and loss as a % of total income'.

3. Run the report

Once you’ve selected your preferences, run the report and download a copy.

Creating a Profit and Loss Statement without Quickbooks

If you aren't a user of Quickbooks but use another accounting software, you may be able to generate profit & loss statements within that program. It's best to do a simple google search or reach out to support if you aren't finding the resource right away.

If you don't have accounting software, you can use this sheet to create a simple profit and loss statement. You will need to gather some financial information in order to complete it accurately.

What should you include in your profit and loss statement?

There are a few profit and loss statement components that you will want to include in your profit & loss statement. If you've used the above resources to create one, you probably have a good idea of what is included but these may vary depending on the industry or needs of your business. At minimum, you should have:

A profit & loss summary – This is just like it sounds; an overview of how much profit (or loss) your business generated in your profit & loss statement. This can be a simple number, like $50K for example or it could also include metrics such as profit % (e.g., profit of 12%), gross profit ($50K / cost of goods sold expense), and net income (gross profit – expenses).

A breakdown by category – This will give you a more detailed look at where your profit (or loss) came from. This could be broken down by product, service, sales region, etc.

How can you use your profit and loss statement to improve your business finances?

The profit and loss statement is an important document for business owners to review regularly. It can help identify trends in your company's financial performance so you can make changes accordingly. Additionally, it can be used as a tool to:

Predict future profit or loss – This is done by projecting your current income and expenses into the future.

Plan for major expenses – profit and loss statements can help you estimate how much profit your business will need to offset the cost of a big purchase or event.

Project cash flow – Profit & Loss Statements don't just tell you about your financial performance in the past; they also show what might be coming down the road. This is helpful for evaluating how much cash you'll need to keep your business running smoothly.

You can use profit & loss statements to help plan for the future or even just get a better idea of where your profit (or loss) is coming from and adjust accordingly. This doesn't have to be an overwhelming, difficult task; it's something that all businesses should review and profit & loss statements are a great way to help you do just that.

What are some common mistakes made when creating profit and loss statements?

There are a few common mistakes that business owners make when creating profit and loss statements:

Not including all expenses – This can distort the overall picture of your company's financial performance.

Omitting revenue – Just as not including all expenses can skew data, omitting revenue will do the same thing in the opposite direction. 

Including the wrong information – This can happen when you're gathering data for your profit and loss statement or when you're putting it together. Double check to make sure everything is correct before submitting.

Getting started with profit and loss statements may seem daunting, but they are an important part of understanding your business' financial standing. Make sure to include all relevant information and double check that it's accurate before submitting.

How can you ensure that your profit and loss statement is accurate?

There are a few things you can do to help ensure that profit and loss statements are accurate:

Be prepared – Have the appropriate information ready when it's time to create one, or if filling out an existing profit & loss statement.

Don't guess – If you're unsure about something in your profit and loss statement (or think you may have missed something), contact your accountant or take the time to find documents with the accurate information.

Check for consistency – profit and loss statements will vary from business to business so make sure the information on yours is consistent with other profit & loss statements in similar businesses.

Are there any other tools that can help you analyze your company's financial performance?

In addition to profit and loss statements, there are a few other tools that business owners can use to analyze their company's financial performance:

Balance sheets – This document shows your company's assets, liabilities, and equity as of a certain date.

Cash flow statements – This report tracks how cash moves in and out of your business over a specific period of time. 

While profit and loss statements are the most commonly used tool for business analysis, it's important to be familiar with all of them so you can get a clear picture of your company's financial standing.

Overall, profit and loss statements are an important tool for business owners to use in order to understand their company's financial performance. By taking the time to create accurate profit and loss statements, you can ensure that you have a clear picture of your company's finances and make informed decisions about the future of your business.

WRITTEN BY LAUREN MURDOCK

Lauren is Mainvest's Content Marketing Manager. She is an expert in marketing strategy and leads content generation for Mainvest.