When you’re running a small business, there are many important financial documents that you’ll need to create, understand, and review regularly. One of the most important documents for growing your business is your profit and loss statement. You might be asking, “what is a profit and loss statement?” You’ll find the answer to that question and more in this guide.
The basics of the profit and loss statement
The profit and loss (P&L) statement, also known as your income statement, shows your business’s revenues and expenses for a set time period. It’s simple: your statement shows a profit if your revenue is greater than your expenses, and a loss if your expenses are higher than your revenues.
It’s important to keep your profit and loss statement updated so that you can easily get an accurate picture of your finances at any time. Using bookkeeping software like Quickbooks makes it easier to update this and other financial documents.
Why your profit and loss statement is important
In addition to your balance sheet and cash flow statement, your profit and loss statement completes the three most important financial documents your business needs to create and maintain. This document gives you an idea of how your business is performing by reviewing your revenues and expenses. With a better understanding of these figures, you’ll be able to create a strategy to improve your profitability.
If your business is publicly-traded, a profit and loss statement is required and must be filed with your statements that are submitted to the U.S. Securities and Exchange Commission (SEC). This is because publicly-traded companies are required to update investors, customers, and other third parties about their financial health, and the profit and loss statement is one document that offers a lot of useful financial information.
If your business is private, the profit and loss statement isn’t legally required but still serves an important purpose.
While your profit and loss statement provides key information to you on your business’s revenues and expenses, it’s also important to have ready when you need funding. Lenders and investors will need your profit and loss statement to get a sense of your profitability. While having more expenses than revenues isn’t necessarily grounds for a decline, it’s an important consideration in your business loan application.
What’s on a profit and loss statement?
Some of the figures on your profit and loss statement include your sales and revenues, operating costs, non-operating income, taxes, cost of goods sold, and depreciation. It will also show any outstanding debts you have and interest payments to give you a full picture of money coming in and going out of your business. With these numbers, you can calculate your gross profit margin, operating profit margin, net profit margin, and operating margin.
Your gross profit margin shows you what you’ve earned after your cost of goods sold is subtracted from your product sales. Similarly, your operating margin shows how much money you’re making after all your operating costs have been deducted.
This is why your profit and loss statement plays such an important role in your business. At any given time, the figures from the statement can tell you a lot about your business’s financial health.
Where can I get my profit and loss statement?
Getting your profit and loss statement is easy if you’re using a bookkeeping software like Quickbooks. Most bookkeeping software has an area for reports and you can select “profit and loss statement” to generate it.
If you’re working with a bookkeeper or accounting firm, they can also generate a profit and loss statement for you when you need it. Creating a profit and loss statement manually can take a lot of time, and you run the risk of including errors when trying to account for all revenues and expenses. There are free templates available through Small Business Development Centers (SBDCs) that can help, but when you can it’s best to use a bookkeeping software or accounting professional to create one.
With your financial documents ready, you can take the next step
Your profit and loss statement, balance sheet, and cash flow statement are important documents that can tell you all about your business’s financial health. With these documents ready, you can apply for business financing when there’s a new opportunity to expand and grow. Pursuit offers more than 15 different business loan programs that can fit nearly any business need. Talk to us today to find out what’s possible.