What Is a Profit-and-Loss Statement?
A profit-and-loss statement is an important financial document that summarizes revenue and costs over a specific period. This statement, also referred to as a “P&L statement,” “income statement” or “income and expenses statement,” can provide valuable insights into the financial health of your business. Creating and analyzing a P&L statement can help you monitor cash flow, make decisions about the future of your business and prepare you to apply for funding.
Learn more about why you need a P&L statement and how to make one.
Profit-and-loss statement: The basics
A profit-and-loss statement is an important financial document that makes it easier for businesses to track cash flow and determine whether or not they were profitable — and by how much — during a specific period.
Typically, profit-and-loss statements are completed monthly, quarterly or annually, though you can choose a frequency that best suits the needs of your business.
Once completed, a profit-and loss statement will yield key metrics regarding the financial health of your business. Keeping track of those metrics, particularly when done often, makes decision-making easier about the future of your business, whether that’s a month from now, a year from now or several years into the future.
When leveraged alongside balance sheets and cash flow statements, a profit-and-loss statement makes business decisions easier. For instance, a P&L statement can help you:
- Identify seasonal, monthly, quarterly or annual trends
- Spot opportunities for growth
- Prepare for potential shortfalls
- Identify theft
- Evaluate your business strategy
- Identify profitable products or services
When you need a profit-and-loss statement
Though there’s no hard rule that requires business owners to produce profit-and-loss statements, there are situations where they are preferred, if not mandatory:
- SBA loans: SBA lenders require applicants to submit a P&L statement that is current within 180 days of their application.
- Commercial mortgages: Commercial mortgage lenders frequently require a P&L statement during approval.
- Investor opportunities: A profit-and-loss statement helps investors get a firm understanding of how profitable a company is.
- Mortgages if self-employed: Self-employed borrowers may be required to submit a profit loss statement when applying for a mortgage.
- Taxes: A profit-and-loss statement can help determine tax requirements or complete Form 1040 if you’re operating as a self-employed entity.
How to read a profit-and-loss statement
Understanding a P&L statement can help you identify key insights about your business. To unlock those insights, it’s important to understand some of the metrics most frequently used in a P&L statement. Though these statements can vary from company to company, they generally include the following:
- Revenue or income: Total amount of income received from selling your goods or services.
- Costs of goods sold (COGS): Total cost of producing a good or providing a service, including materials, labor and any other costs directly related to production.
- Gross profit: Revenue minus COGS.
- Expenses: Salaries, utilities, leases, travel, office supplies, web development and other costs.
- Net profit: What’s left after subtracting your expenses from your gross profit.
Some profit-and-loss statement examples may also include additional information like earnings before interest, tax, depreciation and amortization (EBITDA).
Understanding net profit
Net profits are a key metric in your P&L statement. When positive, this number reflects profits, but a negative number indicates a loss. Losses can happen for a variety of reasons, including a decrease in sales, increase in material costs or operational expenses.
Net profit doesn’t tell the full story, though. If you want to find out why your business was not profitable, you’ll have to look deeper into expenses, costs and revenue to identify potential issues. You may need to compare performance over a period of time, like quarter to quarter, to further isolate any issues.
How to make a profit-and-loss statement
Making a profit-and-loss statement can seem intimidating, but there are plenty of resources that make it easier. Software like Excel, Freshbooks and Quickbooks offer easy-to-use templates to help you get started. There are also plenty of templates available online, including one we’ve shared at the bottom of this section.
Before you dive into creating a P&L statement, you’ll need to make a few important decisions. Consider who will take ownership of this task. In more robust small businesses, this task may be assigned to a member of the accounting department, management or executive body who has proven experience managing profit-and-loss responsibilities. However, if you’re a small business owner, you may need to oversee P&L statements.
Preparing a P&L statement template
We’ve created an easy-to-use, customizable P&L statement template that can help you get started:
If you’re ready to create a profit-and-loss statement on you own, these steps will help you create your own template:
Step 1: Open a spreadsheet like Excel or Google Sheets and name it “Profit & Loss Statement.” Save the document and, starting in cell A1, enter your company name, and any other pertinent information, like the month, day and year. Feel free to customize this information to best suit your needs.
Step 2: After entering the information above, skip a row and type “Revenue.”
In the next rows, enter the name of all sources of revenue you’d like to include. You can choose to enter revenue as a single sum of all income, or add row-by-row entries to provide a more granular overview.
Step 3: Once you’ve entered your final revenue source, move to the next row and type “Total Revenue.”
Step 4: Move one cell to the right and enter the sum formula (e.g. =SUM(B11:B14), including all revenue entries in your equation.
Step 5: Return to column A, skip one row, and type “Cost of Goods Sold” or “COGS.”
Step 6: Using the same approach as your revenue, enter your COGS row by row.
Step 7: Move to the next row and key in “Total COGS.”
Step 8: Move one cell to the right and enter the sum formula, ensuring that all COGS are included in the data range
Step 9: Return to column A, skip one row, and key in “Gross Profit.”
Step 10: Move one cell to the right and enter the subtraction formula for your chosen spreadsheet application (e.g. “=B15-B21”), where B15 is the total revenue and B21 is the total COGS.
Step 11: Return to column A, skip a row and type “Expenses.” Then, using the same process for revenue and COGS, enter row-by-row expenses.
Step 12: Move to the next row and key in “Total Expenses.” Then, move one cell to the right and enter the sum equation for all rows in “Expenses.”
Step 13: Return to Column A, skip a row and then key in “Operating Profit (Loss).” Then, move one cell to the right and enter the subtraction formula to subtract Operating Expenses from your Gross Profits.
Once completed, you’ll have a basic P&L statement. You can use it to track profits and losses over a period of time by following the same steps above and adding new data sets monthly, quarterly or yearly. You can also incorporate formulas to track month-over-month, quarter-over-quarter or year-over-year changes.
What is a profit-and-loss statement?
A profit-and-loss statement is a financial document that shows how your revenue relates to your costs and expenses. P&L statements provide this information by showing the relationship between revenue, COGS and expenses.
Why are profit-and-loss statements important?
Profit-and-loss statements help you determine if your company is making or losing money over a specific period of time, typically monthly, quarterly or annually. You can use your profit-and-loss statements to manage small business finances and make strategic decisions about your business.
Who should do a profit-and-loss statement?
Anyone who owns a business or oversees a company’s finances should create a profit-and-loss statement because it gives a snapshot of business performance during the selected date range.
In addition to keeping tabs on financial health, a profit loss statement may also help you secure funding. Many lenders, including the SBA, will require applicants to submit a P&L statement during the loan application process.