Every business must have a profit and loss statement because it will provide the owner with revenue and expenses details, just as the Cashflow statement does. In addition to providing you with a convenient means to view your company’s revenues and expenses, a profit and loss statement is useful for creating a budget or calculating your business’s working capital.
How to write a profit and loss statement
The time frame within which you desire to have your statement written is entirely up to you. You can choose to do it monthly, quarterly, or yearly. You can use a template or accounting software to create a profit and loss statement. Below are the ways you can create a profit and loss statement for your business.
Collecting and documenting the revenue your company has received is the first step to creating a profit and loss statement. All you have to do is obtain the account balances from your general ledger. It doesn’t matter if you are creating a statement for a monthly revenue accumulation or quarterly, just add up the revenue received within the said time frame.
How the revenue was generated is not necessary, accurate documentation is. So, go ahead and write down every revenue received whether through selling products and services or selling the company’s equipment.
Calculate the cost of goods sold
This is also an important part of a profit and loss statement. You have to include the cost of production of any goods and services sold, in terms of time and materials used.
Determine your gross profit.
This is done by subtracting the cost of goods sold from your revenue. Therefore, gross profit is the profit your business has earned by selling the goods or services that you provide.
Calculate operating expenses
You should calculate your business operating expenses which include rent, travel, payroll, equipment, utilities, postage, etc. When you are done, move on to the next step listed below.
Obtain your business operating profit
Calculate your operating profit by subtracting operating expenses from gross profit. This will you an insight into your profit or loss.
Add additional income to operating profit
Any additional income that wasn’t included in your revenue, such as interest income or dividends from investments, should be included here. When you add this additional income to your operating profit, the total is the earnings before interest, taxes, depreciation, and amortization, also known as EBITDA.
Read also: How to raise money for your business
Calculate interest, taxes, depreciation, and amortization
This is the final step, subtract your interest, taxes, depreciation, including amortization expenses to get your net income, or net profit.
A profit and loss statement is meant to provide your business with a view of all the important financial data. It is pertinent that you keep this inventory intact to determine if you are running at a profit or loss in your business endeavors.