Business & Commercial Law
How and Why You Should Prepare a Profit and Loss Statement For Your Small Business
It’s important for any business to stay on top of its finances, whether it’s a well-established family business or a new side hustle. One essential aspect of small business finances is the profit and loss statement, a summary of all the revenues, costs, and expenses for a given period. Normally these are created each fiscal quarter or, at the very least, once a year. For some businesses, it’s helpful to create a profit and loss statement every month. They are also sometimes called income statements.
Profit and loss statements are essential for you to understand how profitable your business is — or to see if it is in trouble.
Keeping detailed financial records has always been important for any business. But the ups and downs of the economy show that all businesses should be prepared for a financial crisis. And part of that preparation is keeping good records. For publicly traded companies, the profit and loss statement is a required document, shared quarterly and annually with shareholders.
If you started your business with a loan or on credit, it’s essential to keep track of your profits and losses in case you need assistance later. They are also necessary for taxes. Additionally, creditors, investors, and your attorney will need the information contained in the profit and loss statement if you need to file for bankruptcy.
For most businesses, a quarterly profit and loss statement is enough to stay on track financially. However, businesses just getting started or going through tough times may want to keep a closer eye on things. These businesses could update their statement monthly. Profit and loss statements are also tied to specific events, such as the start of a business, acquiring another company, or filing for bankruptcy.
If you’re self-employed and decide to file for bankruptcy, the trustee in your case will need a profit and loss statement early on in the process. If you already have one that you can simply update with current numbers, you can avoid mistakes that will complicate the bankruptcy process.
A complete profit and loss statement will give you your earnings before interest and taxes (EBIT), which provides a clear picture of where your business stands each month.
This boils down to three basic steps:
- Calculate your business’s revenue for the month (gross profit)
- Itemize business expenses (cost of operations + cost of goods sold)
- Subtract expenses from gross profit to find your EBIT for the month
So, the main pieces of information you need for the profit and loss statement is your revenue and your expenses. Revenues include sales of goods and services, royalty payments and other fees, and interest from financial assets. Expenses could be the cost of the goods you sell, administrative expenses, research costs, or other things you pay for to conduct business.
Profit and loss statements do not need to be fancy. What’s important is accuracy. If you ensure you’ve accounted for all profits and losses, you’ll get a clear picture of the financial health of your business.