This statement shows the revenues and expenses of the business, and resulting profit or loss, over a specific time period (a month, a quarter, or a year).
When Do I Need to Prepare a Profit and Loss Statement?
Periodic P&L. Every business needs to prepare and review its profit and loss statement periodically - at least every quarter. Reviewing the profit and loss statement helps the business make decisions and to prepare the business tax return. Your business tax return will use the information from the P&L as the basis for the calculation of net income, to determine the income tax your business must pay. Pro Forma P&L. A new business needs to create a profit and loss statement at startup. This statement is created pro forma, meaning that it is projected into the future. Your business will also need a pro forma P&L when applying for funding for any new business project.
What information do I need to prepare this statement?
Most of the information for this statement comes from your first-year monthly budget (cash flow statement), and from estimated calculations on depreciation from your tax advisor. Specifically, you will need: If you are using business accounting software, the profit and loss statement should be included with the standard reports. Even if you have this report in your system, you should still know what information is required to prepare the report.
Adding Cash Transactions to Your P&L
Don’t forget to add cash transactions, both income and expenses. Even if you have business accounting software, you may still have to enter cash transactions manually, including cash for petty cash and income. If you accept cash from customers, use a cash transaction form (available from office supply companies) or a simple invoice. For cash payments, save the receipt. These receipts are especially important for business driving and business meals expenses.
Preparing a Pro Forma (Projected Profit and Loss Statement
If you are starting a business, you don’t yet have the information to prepare a real P&L statement, so you have to guess. A pro forma statement is usually prepared for each month of the first year in business, but your lender may require you to add more months or years to the projection to show the break-even point when your business is generating positive cash flow on a consistent basis.
- List all possible expenses, over-estimating so you aren’t surprised. Don’t forget to add a category for “miscellaneous” and an amount.
- Estimate sales for each month. Under-estimate sales, both in timing and amount.
- The difference between expenses and sales is usually negative for some period of time. The negative amounts should be accumulated to give you an idea of how much you will need to borrow to get your business started.
Preparing a Periodic Profit and Loss Statement
The preparation process and information needed is the same whether you are preparing a statement at startup or to use for tax preparation or business analysis. For each row, you will have a quarterly amount and then a total for the year. The number you have now is net earnings, or your business profit - or loss.
