What is a Profit and Loss Statement?
A Profit and Loss (P&L) is a report that lists your business’ revenue (or income) and expenses. It’s for one calendar year, from January to December. If you begin your business in May, then the P&L for that year would include transactions from May to December.
The revenue is a list of where you received money from for the year. It could be product sales, sales of services, grants, loans, etc. The expenses are what you spend money on to make your business run. Expenses are anything from legal and bank fees to product materials and equipment or tools needed for day-to-day operations.
The total dollar amount of expenses is subtracted from the total dollar amount of revenue and will either be a profit or loss. It really should be called a Profit OR Loss Statement.
Have you ever heard finance people say, “we’re in the red”? Because in a spreadsheet, when the revenue is less than the expenses, the number is red when it’s a negative number. So, in red means loss, and in black means profit.
Profit and loss statements can be broken up into monthly and quarterly. At the end of the calendar year, put it all together for the whole year. It’s easier to track little by little throughout the year than waiting until the end of the year to track everything.
What do businesses use a Profit and Loss Statement for?
To file your taxes. You can send a copy of your P&L to your accountant or use it to file your own taxes.
Review the P&L with your team to get valuable sales information.
Use it to apply for loans or submit grant applications.
How is a Balance Sheet different from a P&L?
A balance sheet also has two lists. It lists the business’s assets and liabilities. Examples of assets for a construction business are vehicles, equipment, and tools. Examples of liabilities are business credit cards, business loans, investors, etc.
What are some things you can write off as business expenses?
Home office space. First, get the square footage of your whole home. Then measure the square footage of the office space within your home. Gas mileage and travel are also business expenses. Here’s a little expense tracking hack: go to Pinterest and search “gas mileage log” and use the log to track your gas mileage whenever you make
Common mistakes people make on a profit and loss statement?
Most people do not put down enough expenses. For example, a cell phone and a monthly cell phone service are both expenses. Put down anything that you use to run your business.
We’re not in the habit of talking about money. Even if there is a loss, it’s pretty amazing to see all of the revenue that you generated from your business. Let’s continue to get comfortable with talking about money.
Most business owners do not use a profit and loss statement to gather information about their business. Take a look at your P&L and see where your business can get more sales? Is it time to add new products? Where can your business reduce expenses? Ask questions and pay attention to sales and expenses patterns.
Here are a few tools and applications for tracking income and expenses:
- Excel spreadsheet
- Google sheets
- Quickbooks
- Wave
- Quicken
Happy money tracking!