Understanding your profitability is absolutely vital if you are to make good business decisions. A profit & loss statement will help you to determine whether your revenue is greater than your expenses, and thus whether you are making a profit or a loss.
There are three main sections to a profit & loss statement – expenses, revenue, and net income.
Expenses are the amounts you are paying to other people: the costs of running your business. Revenue is the money that is paid to your business by your clients and clients. Net income is the difference between these two amounts. When revenue minus expenses is a positive number, you are making a profit. When it is a negative, you are making a loss.
Preparing a Profit & Loss Statement
Preparing a profit & loss statement will let you see at a glance how your business is performing. By comparing your revenue and expenses you will quickly see if you are making a profit, and how much. Here are the steps you should follow to create a profit & loss statement:
STEP 1 – ENTER YOUR REVENUE
This is the total sales revenue or income you have received for the given reporting period.
STEP 2 – ENTER YOUR EXPENSES
To determine whether your business is operating at a profit, you need to subtract all your expenses from your revenue. This includes not only the direct costs of manufacturing or purchasing products, but indirect expenses such as property rent, taxes, salaries and any other amounts that are going out from your business.
STEP 3 – CALCULATE NET INCOME
To calculate your net income, simply subtract your total costs from your total revenue. The resulting figure will tell you how much income you have remaining after paying all your business costs – your profit.
Is a Profit & Loss Statement the Same as an Income Statement?
Yes. Both statements are used to report your business revenue, expenses and net profit.
How Frequently Should I Prepare a Profit & Loss Statement?
There is no specific requirement to produce a profit and loss statement. However, like most financial reports it is commonplace to prepare them on a monthly, quarterly or annual basis.
What Information is Required for a Profit & Loss Statement?
To complete a profit & loss statement you will need to enter your business revenue and expenses. These should be determined before preparing your P&L statement.
What is the Formula for Calculating Net Profit?
The net profit formula is as follows:
If the figure resulting from the above formula is greater than zero, you are making a profit. If it is less than zero, you are operating at a loss.
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