So what exactly is a profit and loss statement? Quite simply, it’s a financial summary of your company’s revenues, expenses and resulting profits or losses over a given period of time. This crucial document allows business owners to gauge how much money each division, department or service is bringing in during reporting periods while measuring it against how much is being spent, both in total and in specific subcategories, over that same timeframe.
This way, business owners can make informed decisions on how to manage costs associated with running the business, including what areas need to be trimmed or cut altogether and which ones need to be boosted.
Profit and loss statements are intended to make the lives of corporate decision-makers easier. However, in order for them to do this, they also need to be easy to follow and understand. Below are a few tips on how to best organize your P&L statement.
P&L statements are typically rendered monthly, quarterly and yearly. Analyzing profits and losses across the shorter timeframes help business owners adjust their strategies so they can improve their fiscal outlook across longer timeframes. By learning from one bad month, adjustments can be made so that subsequent months are more productive, which ultimately makes for a better quarter. Similarly, applying lessons learned from a bad quarter can help improve the fiscal year figures. However, the statement can ultimately cover whatever period of time you wish. Since it is meant as a tool to help you determine net income over a given period, choose a timeframe that makes the most sense for your business model, transaction volume and reporting structure.
Every transaction referenced in the statement, be it a revenue or an expense, should have certain details associated with it. Such details include the date of the transaction; the transaction type (was it a deposit, debit, check payment, something else?); the party with whom the business was transacted; an invoice number; and a class, category or job number that identifies the department (business and legal affairs, human resources, project X, etc.). In addition, a memo section should be included for notes and descriptions about the transaction. Last but certainly not least is the amount of the transaction and the resulting balance showing the new total of all transactions in that class. These categories are most commonly enumerated along the statement’s “X” axis.
Revenue transactions are usually organized among groups that help identify the type or source of the revenue. These groups are enumerated along the statement’s “Y” axis. Revenue groups might include services, sales, investments and miscellaneous income. More specific subgroups are then broken out under each group, providing yet further detail for the reader. For example, subgroups under the “services” section of a car wash’s P&L might include basic washes, wash-and-wax combos and full detailing. Break out revenue groups and subgroups in a way that makes it simple to identify which areas of your company are the most productive.
Just like revenue transactions, expenses should be organized through the use of groups and subgroups along the statement’s “Y” axis. Categorizing expenses can be tedious since they can often be numerous. Examples of primary expense groups include employee payroll, advertising, legal fees, insurance costs, office supplies, office rent, travel costs and taxes. Less obvious groups might include bank service charges, working meals, employee bonuses, gifts and amenities, dues and subscriptions, maintenance, postage and delivery charges. Many of these will then be broken down into smaller subgroups. For example, advertising expense subgroups might include Internet, print, television, radio, publicity and in-store promotions. Again, organize groups and subgroups in a way that makes your expenses easy to track.
Remember, profit and loss statements are your friend. They’re a reliable tool for determining your company’s net income and can be a valuable asset when soliciting outside investment. But they must be thoroughly maintained and should be backed up by corresponding documentation such as payroll registers, bank transaction records, invoices, receipts and deposit slips. If you feel inadequate to create and maintain a P&L, be sure to hire a CFO, accountant or other capable individual who can.