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Small businesses have unique challenges when it comes to financial statements. Owners rarely have accounting backgrounds, and often operate without a finance team. This can make it difficult to identify the most important financial data for the company. One financial statement that every small business owner should be aware of is a Profit & Loss (P&L) statement. It’s also commonly referred to as an income statement. This document can reveal any red flags in your business finances and help inform future business decisions. In this blog, we’ll cover the basics for P&L statements and explain how to write one.

What is a profit and loss statement?

A P&L statement is a financial document that summarizes a company’s revenue and expenses over a period of time. This information is used to calculate the net profit or loss for the business. The P&L statement can be prepared on a monthly, quarterly, or annual basis.

What can you learn from a profit and loss statement?

The best place to find big picture, quarterly or annual insights into the financial health of your business is in this document. Reviewing a P&L statement will help you track revenue growth, identify areas of high expense, and monitor profitability. This information can be used to inform future business decisions. Here are a few specific ways it can help:

Identify relationships between expenses and revenue

Your P&L statement will summarize your spending, and more importantly, whether it’s leading to profit for your business.

Those investments you made in digital marketing or expanding your sales team—did they lead to more revenue? More importantly, did they improve your bottom line? Your P&L statement will show you. You’ll also see changes in overhead costs compared to business performance. This is one of the best ways to find inefficiencies in your business operations.

Tax Preparation

Your business taxes are based on your net profit or loss. So naturally, a comprehensive P&L statement will contain much of the information that the IRS uses to calculate how much tax you owe for the year. If you’re already writing P&L statements, you’ll be all the more prepared for tax time.

Is your business in a position to borrow money?

In addition to a business credit report, banks or lenders may ask for a P&L statement before they approve any business loans. They’ll look at your revenue, expenses, and net profit to get an idea of your financial health. Lenders want to see that you’re making enough money to cover the loan payments, with some room to spare. A strong P&L statement improves your chances of loan approval.

Even if you’re already working with a line of credit or a short term cash influx, the P&L statement will help you budget the funds to pay it back, or budget your expenses so you don’t stretch too far.

Related: 16 Ways to Finance Your Small Business

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How to write a profit and loss statement

Now that we’ve covered what a P&L statement is and what it can do for your business, let’s go over how to actually write one.

The first step is to gather your financial information. This includes all revenue and expenses for the period you’re covering. You can get this data from your accounting software, bank statements, and receipts. Rather than combining bank statements for expenses, we recommend tracking and categorizing this data in real time.

Next, you’ll want to create a template for your P&L statement, and export your revenue and expense data. You can find templates online or in accounting software programs like QuickBooks or FreshBooks.

Once you have your template set up, you can begin filling in your revenue and expenses. Be sure to include the date, description, and amount for each entry. Once you have all the data entered, you can calculate your net profit or loss.

Real-time financial health of your small business

P&L statements are useful for quarterly business planning, large performance assessments, and taxes. But they aren’t a viable option for day-to-day business decisions.

Though you can follow a template to produce P&L statements fairly quickly, it’s not realistic to have them available for every decision. Practically speaking, small business owners need more immediate data than banking and financial statements provide. They need to know how every decision impacts their cash flow. In addition, they need to see trends in their income and spending to identify opportunities for growth.

Consider an all-in-one financial management platform that connects with your bank and accounting tools. This will provide real-time, unique data for your business that doesn’t require a long day with Excel spreadsheets.