What is a Profit and Loss Statement (P&L) & Why Is It Important?

What is a Profit and Loss Statement (P&L) & Why Is It Important?

What is a Profit and Loss Statement (P&L) & Why Is It Important?

A profit and loss (P&L) statement is a report that details a company’s revenue and expenses over a period of time (usually a quarter or fiscal year). The P&L statement, also called the income statement, shows whether a company lost money or made a profit during the reporting period.  

When Your Business Needs a Profit and Loss Statement

As a small business owner, you probably already have a number of responsibilities on your to-do list. Depending on your situation, you may have to manage taxes, monitor your business credit and finances, and perhaps even oversee daily sales or operations. 

It’s understandable that you might feel worried about adding more duties to the ever-growing pile. But once you get used to filling out your income statement template, you’ll get faster at the process over time. Your accounting software may help you complete this task as well.

The good news is you don’t need a business accounting degree to learn how to use these statements. Your accounting software can often help you create a P&L, or your accountant can help as well.

Pro Forma P&L

The first time your business should create a P&L statement is right at the beginning. You probably won’t have any actual income or expenses to report at that point. Still, you can create a pro forma P&L to project these figures for the future. Pro forma income statements may be helpful when you apply for business loans or other types of financing.  

Periodic P&L

All established businesses should prepare a P&L statement from time to time. Ideally, your company should create a new report at least once a quarter. Monthly income statements are even better. 

A periodic P&L statement can help you manage your business finances. You can compare your current statement to previous ones and see if your net income is improving or declining. A P&L statement can also help you when it’s time to prepare your business tax return. 

Other Types of P&L/Income Statements

Other types of P&L statements include:

  • Single-step P&L statements are the simplest format for a P&L statement with subtotals for revenue and expenses. 
  • Multi-step P&L statements further break down revenues and expenses into operating and non-operating revenues and expenses. 
  • Comparative income statements compare different periods (such as quarterly or annual reporting periods).
  • Common size analysis P&L statements present line items as a percentage of revenue.
  • Profit & Loss variance statements show the difference between amounts budgeted versus actual income or expenses.
  • Contribution margin P&L statements show net profit by first deducting variable expenses from sales to determine the contribution margin, then subtracting fixed expenses. 
  • Driver-based P&L statements are used to create forecasts, often for executive planning. 

What Information Goes on a P&L Statement? 

Before you prepare a statement of profit and loss, you’ll need to gather information about that money that flowed into and out of your business during the time period in question. Make sure your bookkeeping is up to date so you’re working with current information. If you already have a company cash flow statement, it may contain many of the details you need.

In addition to your statement of cash flows, you may also gather information from the following sources: 

Your Business Bank Statements 

Search your bank statements for all sources of income deposited during the reporting period. Your company’s income categories may include:

  • Sales Revenue – Total sales earned when your company sells goods or services
  • Affiliate Commissions – Commissions received when your business promotes or sells another company’s products or services
  • Rent and Lease Payments – Income earned from leasing equipment or property to others
  • Royalties – Money earned when you create a product and someone else sells it on your business’ behalf
  • Non-Operating Income – May include interest earned on investments or savings
  • Gains – Profits made from the sales of the company’s assets, like equipment, property, etc.

Your Accounting Software

Next, assemble a list of the funds that flowed out of your business during the time period featured in the report. The transactions list in your accounting software or checkbook ledger should contain these details. Alternatively, you can review your bank statement for the data you need.

Group all expenses incurred into categories, such as:

  • Operating Costs (aka Administrative Expenses) – Rent, salary, wages, marketing, insurance, legal fees, and other overhead costs
  • Costs of Goods Sold (COGS aka Cost of Sales) – Inventory, shipping, storage, raw materials, etc.
  • Depreciation and Amortization – May apply to equipment, machinery, buildings, or other property your business owns
  • Taxes – Income tax paid
  • Interest Paid on Debt – Interest expenses incurred on business credit card accounts, business loans, lines of credit, etc.

Cash Receipts

Be sure to include cash transactions in your P&L as well — both income and expenses. Cash deposits should be detailed in your business checking account and your accounting software, if you recorded them previously. It’s also wise to save your receipts to make reporting cash expenses easier. 

Simple Profit and Loss Statement Example

The table below shows an example of a simple profit and loss statement.

Simple P&L Statement Example
Quarterly Income
Non-Operating Income$5,000
Total Quarterly Income$115,000
Quarterly Expenses
Operating Expenses$25,000
Cost of Goods Sold$30,000
Total Quarterly Expenses$85,000
Net Income$30,000
Sample P&L Statement

Why You Need a P&L Statement

We’ve covered when your business needs a P&L statement and some basics about how to create a simple one. Below are a few reasons why your business needs an income statement in the first place.

  1. You can use a P&L statement to improve your bottom line. By periodically taking stock of your company’s income and expenses, you can get a better idea of how it’s performing financially. You may discover how to boost your net income, and ultimately business profits, by increasing revenue, cutting expenses, or some combination of the two.
  2. Put your business in a better position to borrow. When you apply for business funding, lenders will often review your financial statements, including the P&L statement, as part of the application process. Of course, your business credit scores and reports are often among the key factors considered when you apply for a loan. Yet a P&L statement that shows your company is in the black can be a big plus.
  3. A P&L statement might be required. Is your company publicly traded? If so, you’re likely required to file annual reports (and other reports) with the Securities and Exchange Commission (SEC). An income statement is part of the financial information your business must disclose in these reports.
  4. P&L statements can help you prepare your taxes. Unless you’re an accountant or a big fan of numbers, you likely don’t enjoy preparing your business tax return. Many business owners don’t consider this particular obligation to be much fun. Yet if you prepare regular P&L statements, filling out your tax returns could be less painful. Through your P&L, you’ll already have access to much of the information you need. 

The Difference Between a P&L Statement and a Statement of Revenue

A statement of revenue and a P&L are the same financial report. There are actually four different terms used to describe the report that helps you calculate your company’s net income — profit and loss statement, P&L statement, statement of revenue, and income statement. 

Is Profit And Loss Statement and Income Statement the Same?

Yes, you will often see the terms P&L and income statement used interchangeably.

Final Word: Profit and Loss Statements

Keeping track of your company’s financial performance is critical to its long-term success. That’s why a P&L statement can be such a valuable tool for a business owner to use. 

By creating regular profit and loss statements, you can track your company’s financial health over time. This knowledge can provide you with opportunities to either double down on smart business strategies that are working for you or make course corrections when needed. 

Does the idea of creating regular P&L statements or other financial documents feel overwhelming? Remember, you don’t have to create these statements on your own. You can hire a professional accountant to help. Even if you’re comfortable creating your own financial reports, a professional accountant  can save you time and free you up to focus on other areas of your business.

This article was originally written on January 8, 2020 and updated on July 29, 2022.

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