A P&L summarizes the revenues, cost, and expenses during a defined period of time. Thoroughly understanding your small business’s finances is the key to running a successful business. Generating periodic profit and loss statements are crucial to making informed business decisions, preparing tax returns, and gaining insights into the health of your company. Let’s take a closer look at preparing profit and loss statements for small businesses.
The Importance of Profit and Loss Statements
In order to make strategic and informed decisions concerning your business, you must understand the finances of your business. A profit and loss statement shows the expenses and revenues of your business over a specific period of time. The period of time could be as short as one month or as long as a year. Many businesses choose to create a profit and loss statement quarterly. Owners and managers will be able to see numbers both before and after taxes.
When Does Your Business Need to Prepare Profit and Loss Statements?
There are certain times in a business’s life that profit and loss statements are crucial to understanding the best decisions to make for growing or maintaining your business. It is important to create a profit and loss statement when starting your business. This may seem useless since you do not have any statistics or sales at this point. However, this profit and loss statement is a projection of the future and is important when trying to secure funding and investments.
Profit and loss statements are also important when preparing your business’s tax return. It is essential to generate profit and loss statements on a regular basis. Not only are these statements useful for making important business decisions, but you will need them to determine the amount of income taxes that your business owes as well.
What Information is Needed to Generate Profit and Loss Statements?
Part of small business ownership is keeping detailed records. In order to create an accurate profit and loss statement, there are certain pieces of information that you need to keep track of throughout the month, quarter, or year. You will need to keep a detailed list of all transactions made. Keep a record of what the transaction was, the date, cost, and the method of payment. Was it a credit card, checking account, or cash?
In addition to keeping up with your expenses, you also need to keep detailed records of your sources of income. As with your expenses, document the source of income, the method of payment, and the date.
How to Prepare Your Small Business’s Profit and Loss Statement
The exact format of profit and loss statements can vary between businesses, but the general idea is the same. First, you will list your income from your different sources and total these numbers. Next, you list your operational expenses and total these numbers. Next, you must incorporate taxes, depreciation, amortization, and any other information which might affect the accuracy of the final profit or loss numbers for that period of time.
This is a very simplified version of a profit and loss statement. At the end of the day, your profit and loss statement should tell you the business’s gross margin, net operating profit, net profit before taxes, and overall net profit or net loss of the business.
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