An Income Statement is the most important financial statement for a business. This accounting statement…
As a Raleigh small business owner, your profit and loss (P&L) statement can help you prepare your tax return, can open the door to getting approved for lines of credit, and also provides you with key information regarding your business's financial health. However, many business owners don't prepare their statements regularly (or at all!), or if they do, they aren't analyzing the information in them because they seem technical and confusing.
We believe that your success lies in your ability to understand your finances and make decisions and strategies based on your data. To help you with this aspect of your small business accounting, we are providing some tips to create and leverage your profit and loss statements.
What Is a Profit and Loss Statement?
A profit and loss statement, or income statement, is the report that shows you an overview of your business's income, expenses, and profits or losses over a period. It's also called an income statement, earnings statement, or statement of operations. Many businesses run this report monthly or quarterly.
Why Is an Income Statement Important
First and foremost, your income statement is essential for determining how much you owe in taxes. An inaccurate statement or estimations can leave you paying significantly more than you really need to or you may underpay, which can leave you in serious trouble. With an accurate P&L ran at regular intervals and the right team helping you with your small business tax preparation, you don't have to stress.
Additionally, your P&L is often a requirement from your bank if you want a small business loan - they use that to determine your financial solvency and if you generate enough in profit to be able to pay back debt.
Finally, your income statement shows you the outcome of your decisions and how your business is operating. This is where you get clear data showing where you can trim back expenses and leverage your more profitable goods or services. Plus, you can look at your profit and loss statement to see if you can pay more toward a debt or hire additional staff.
Components of a Profit and Loss Statement
At it's core, your P&L will have three key components:
- Money is coming in (income)
- Money going out (expenses)
- Amount after subtracting expenses from income (profits or loss)
Let's break it down a bit further, though, to help you create your own income statement that paints a more clear picture of your business.
Income is how much money you're bringing in. While you can make this one line on your P&L, simply titled "Sales" or "Income" you can also break it down depending on how you keep your financial records, such as sales by category or by sales of goods and sales of service. For example, let's say you own a coffee shop, your income section may include lines for:
- Baked goods
- Whole beans
- One time income (selling equipment, refund from wholesaler, tax refund)
- Total income
Your expenses are all your outgoing money, from your advertising and payroll to paying for office supplies and wholesale goods. Your expense section should be broken up into a few sub-categories, including:
Cost of Goods Sold
Also called "cost of sales," these expenses are the direct costs of doing business - your costs of materials, vendor payments for the items you sell. These costs are proportionate to your sales in that the more you sell, the more your cost of goods sold goes up. However, anywhere you can reduce your costs (without sacrificing quality!) is a plus.
Going back to the coffee shop example, your Cost of Goods Sold may include:
- Whole bean and tea vendors
- Food or ingredients vendors
- Bottled drinks
- Materials (cups, sugar packets, flavored syrups, napkins, etc)
- Espresso machine rental
Note: subtracting your Cost of Goods Sold from your Income gives you your Gross Profit.
Selling, General, & Administrative, also called operational expenses are all the costs that are involved in running your business that aren't directly tied to the goods you sell or service you provide. Think things like your rent, utilities, travel, marketing and office supplies. This section, depending on your business, can be very large. Again, using the coffee shop example:
- Store rent
- Utilities (electricity, water, phone, internet)
- Technology, such as software or hardware purchases or ongoing licensing subscriptions
- Office supplies
- Repairs & maintenance
- Company vehicle
- Business insurance
Some businesses do have to factor in things like interest payments on loans, depreciation expenses like how much your equipment has lost value, and of course sales tax reporting. When figuring these costs, it may be beneficial to speak with a small business accountant for additional information.
Profit (or Loss)
Once you have your income determined and your expenses calculated, subtract your expenses from your income, and you should have your business profit or loss depending on if the number is negative or positive.
Creating Your Profit and Loss Statement
If you'd like to make your own profit and loss statement, there are multiple templates online available that are free, including one through Google Sheets. It's very basic, but it's easy to update and customize.
However, as a business owner, you may find that preparing your income statement is time-consuming and overwhelming, and if you're just starting out, you may make a costly mistake. That's why reaching out to a qualified CPA to prepare your financial statements or provide advice may be a better option that can save you time and money.
Contact Us for Bookkeeping and Financial Statement Preparation Help
The experienced team at C.E. Thorn, CPA, PLLC is dedicated to working with small businesses on a monthly basis in and around Raleigh. We help businesses succeed through efficient bookkeeping, tax preparation services that save time and money, and help you understand your financial statements so you know the health of your business.
To learn more, contact our small business accounting team by calling us at 919-420-0092 or complete our contact form to get started today!