Your profit-and-loss statement is a vital tool to run your business
In the hustle and bustle of running your business, it’s easy to ask yourself, “Am I making any money?” The way to find out is simple: Revisit your P&L. A profit and loss statement, also known as an income statement, measures a business’s income and expenses over a period of time. It’s an easy way to compare money coming in to money going out to see if your business is making the financial progress you expect.
A valid P&L doesn’t have to be complicated, but it does need certain categories to function well. At the top is your heading, which clearly labels the type of report and the time period applicable. In the example to the right, XYZ Spa created a P&L Statement for January.
Begin by calculating your gross profit, which is your total sales minus the cost of the goods that you sold. In the example below, XYZ Spa had total sales of $26,625 for November. The cost of the goods sold was $8,000, leaving their business with a gross profit of $18,625.
Of course, a business has more expenses than the cost of its inventory. A P&L is important because it factors all those expenses into one document so you can make sure your markup is enough to cover your other expenses. The amount left after those other expenses is called your operating profit. This is where you’ll include categories such as depreciation and amortization, administrative expenses, marketing and even bad debt expenses. For January, XYZ Spa had an operating profit of just over $4,000. This is the gross profit minus the operating expenses.
Other forms of income or expenses are tallied at the bottom of your P&L, which then allows you to see the number everyone cares the most about. Is your business making money? For XYZ Spa, January was a positive month with a profit of nearly $3,000.
Complete a P&L for your business every month, every quarter, and every year to continually monitor the financial health of your company. Constantly monitoring your P&L will also help with long term strategizing for your business because you can use profits from a good month to help cover costs during slower seasons, if necessary.
As you revisit your P&L statement, compare different accounting periods. Monitor how income and expenses change over those different periods and take note of what’s meaningful. For example, income may increase over the course of a couple of years, but that’s not beneficial if expenses are growing at a faster rate.
When used regularly, your P&L is an important accounting tool that provides an in-depth — yet efficient — look at your business’s financial performance.