What is a small business profit and loss statement
Let us start by asking
“what is a small business profit and loss statement?”
A profit and loss statement for small business or large business is all the same. It is a summary of the performance of an enterprise over a fixed time period. The normal execution of the P&L is monthly, quarterly and annually. A P&L is an accurate assessment of the past performance of a company and is most often the favorite tool of the small business owner who wishes to track progress. What I call a Profit and Loss Statement is also commonly called a Statement of Financial Performance or simply, an Income Statement.
The P&L puts in summarized financial format, the period income minus the expenses incurred in the same period. The difference between is either the profit (hopefully) or the loss (regrettably).
Any small business, be it a sole proprietorship or a partnership does not have any legal reason to prepare a period P&L. They are not a necessity for filing the annual tax return of the small business. For me, this is beside the point; an accurate profit and loss statement is required to get a fix on your business health. Most small companies, unless they are real “Mom and Pop” shops usually use a canned financial software package. These small business packages most often include an automatic statement of your profit or loss at the push of a button.
Why Is A Small Business Profit And Loss Statement Necessary?
To put it in a nut shell, the answer is, “am I making any money or not?” If I am making money, how much? If I am losing money, how much?
A well designed P&L statement not only answers these brutal questions, it will not only tell you if you are winning or losing, it will tell you where you’re positive and negative issues lie. This is what happens when you tie the results to your budget. Any difference during the reporting period between budget and actual is referred to as a variance. These variances can be either positive or negative. As a quick example, on the expense side of your P&L may be your telephone expenses. If you budgeted $500 for the period and the actual bill was $450, your P&L will reflect a $50 positive variance. A P&L is not a difficult thing to understand.
Your P&L will allow you to have a raw measure of how your business stacks up to the industry norm. It is the best tool of all as an aid in preparing next period’s budget and it shows you, and potential sources of additional capital, the overall health of your business and the raw numbers you need when you complete your individual tax return.
The profit and loss of any business is based on the revenue over a period of time. From this revenue, the cost of goods sold is deducted, this results in Gross Profit. From this, expenses are subtracted and Net Profit is derived. Simple. Let’s have a look at a sample profit and loss statement for small business.
Example of a Profit and Loss statement
INCOME STATEMENT, PERIOD JANUARY 1 TO DECEMBER 31, 2012
|Cost of goods sold|
|Inventory January 1||150,000|
|LESS Inventory December 31||-100,000|
|Cost of goods sold||145,000|
|Interest on loans granted||500|
|Salaries and wages||70,000|
|Travel and Entertainment||2,400|
|Repairs and Maintenance.||900|
|Taxes and Licenses||12,400|
As you can see, the items listed on your P&L are the same as those that should be identifiable, hence listed on your budget. Any variable, be it positive or negative can be very helpful in preparing your next year’s pro-forma P&L. Your author is a firm believer in turning out a P&L monthly. There is nothing quite worse than being told to close the door when the horse has bolted. If you find that your expenses are grossly out of line with your budgeted forecast, the time to make any necessary adjustment is ASAP, as soon as possible.
I hope you can see how simple it is to create a small business sample profit and loss statement. By entering the income and expenses into your books timely, the process of making the statement is very simple and straight forward, however, if you are negligent in recording you income and your expenses, you are simply begging for trouble.
When using the small business profit and loss statement template that you will find as an integral part of some of the more popular small business financial suites, such as Quicken you will have few difficulties in managing your business.
To easily develop a “slick” way to post your income and expenses, it is recommended that a chart of accounts be set up. This is nothing more than a host of numbers that are assigned to documents as they are received. A small business must try to keep things simple, as more often than not, the books are kept by the entrepreneur himself. A simple example of an account number is thus:
- 900 Communications
This catchall will allow gathering of all pertinent invoices for communication in one basket. It is not overly important for a small business to know exactly the breakdown of mundane expenses. Under communications will fall land line telephone, cell phone expense and internet service! Huge corporations with significant communication exposure may very well want to capture these unique expenses, small business does not have to go this far.
The important thing for a small business is that it has a full understanding of itself; it does not need to burden the owner or his compact staff, as long as he has a small business profit and loss statement to help him guide the company that will suffice.
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