How often have you looked at the chaos of your trade business finances and wondered, “am I even making a profit anymore?”. But when you’re too busy running your business, it can feel like the only option is to push these doubts aside until you have the chance to find a better solution. If you’re not ready to make the commitment and invest in software to automate your finances and report your profitability directly, then a detailed profit and loss statement is the next best thing.
You’ve likely run your trade business using a simplified version of a small business profit and loss statement up until now. However, once your business grows to a certain size and complexity, running a sheet with rough profit and expenditure figures is no longer enough to get the job done right.
Already know everything there is to know about profit and loss statements? Skip to this section and download our free template to start immediately, or read on as we cover the basics.
What Is A Profit And Loss Statement?
A profit and loss statement in its simplest form is a balance of income and expenses over a set period. You could run one quarterly, or you could run one yearly. You could even run one weekly if you really want to drill down into your trade business and see what’s making you money and what’s sapping your resources for no returns.
Regardless of how you define a profit and loss statement or how often you run one, think of the entire process as a way of snapshotting your business’s current revenue for record-keeping and future planning.
Why You Need A Profit And Loss Statement
There are countless reasons why your business will benefit from running a detailed profit and loss statement. Still, we’ll give you the top three points we believe apply most to savvy trade professionals.
1. You make wiser decisions with data.
An up-to-date profit and loss statement will come in handy whenever you have to make a financial decision. Want to know whether an ongoing client is profitable enough to keep doing business with? Your profit and loss statement will tell you. Want to see if you can expect hard financial times ahead or whether your business can grow without fear of failure? Your P&L statement will come to the rescue once again.
2. You have proof of your business success.
A profit and loss statement doesn’t just get thrown in the bin when you’re done recording data after a set period. Now you have an archive of your past financial success, and you can prove it to investors and big clients should the need arise.
3. You have a crucial document for tax time.
When tax season rolls around, you’ll have comprehensive business financials to give to your accountant or use to complete your tax lodging. Keeping an updated P&L statement also helps your other financial recording systems, so accounting package users can double dip on its usefulness come tax time.
Is A Profit And Loss Statement Necessary For Small Businesses?
You’re probably wondering whether your trade business is even big enough to benefit from a profit and loss statement. The short answer is yes. The long answer is that having a profit and loss statement for small businesses is often more important than a P&L statement in larger companies.
Running a small business means keeping admin work to a minimum, and a profit and loss statement can be used in so many different situations that it makes great sense to have one as a small business owner.
The Difference Between A Profit And Loss Statement & A Statement Of Revenue
You may have heard the term ‘Statement of Revenue’ used instead of ‘Profit and Loss Statement’. Don’t be confused; the two terms are interchangeable! If your accountant or financial service provider uses a different term, make sure to clarify that you’re speaking about the same document to avoid confusion in the future.
Our Free Downloadable Small Business Profit And Loss Template
You’ve probably got a million better things to do than waste time creating a profit and loss statement template for your business, so we’ve gone ahead and made one for you.
Make sure to grab a download because we’ll use our profit and loss template to explain how to analyse and create one yourself if you need something a little more specific to your business needs.
How To Analyse A Profit And Loss Statement
By now, you should know that a profit and loss statement outlines a business’s income and expenses over a defined period. When it comes to analysing one, though, you’re going to need to know a little bit more about your company accounting processes.
The first thing to find out is whether your business reports on a cash basis or an accrual basis, which we’ll outline below:
Cash Basis: Revenue is reported when income is received, and expenses are reported when money is paid out of the business.
Accrual Basis: Revenue is reported when it is earned, and expenses are reported when they are incurred.
To summarise, the difference between Cash and Accrual is the time when revenue and expenses are recorded; here’s a quick example of each to help clarify further:
A client contacts you with a job, and after quoting the work, they agree to pay the total sum of $600 in three monthly payments of $200. In this example, your trade business’s financial reporting period is from 1st January to 31st December.
Under an Accrual Basis: Each $200 payment is recorded before your business receives the money.
Under a Cash Basis: Each $200 payment is not recorded until your business has received the exact amount.
Why is this so important?
Your company’s accounting method affects how income and expenses are represented on your profit and loss statement template, so it’s important to find out from your accountant which system they use before analysing your P&L documents.
Once you know which one you use, you can begin analysing the data. We’ll provide two basic analysis methods you can use below:
1. Horizontal Analysis:
If you want to look at how specific line items on your profit and loss statement change over time, then a horizontal analysis is the way to go. Because a horizontal analysis can be factored over long periods, it’s most helpful in looking at patterns or cycles. For trade professionals who rely on seasonal work, this can be an essential analysis method for getting a good idea of how the next year will go by looking at the last few.
2. Vertical Analysis:
A vertical analysis is the way to go if you want to map specific expenses to your business’s overall revenue. By mapping company spending to revenue creation, you can quickly see which methods of creating and retaining work positively contribute to your cash flow and which you should cut for the sake of profitability. For example, your marketing budget might look like it’s generating lots of work, but if the revenue created by that work doesn’t exceed the amount spent, then you might want to re-evaluate how much you’re spending on advertising.
How To Create A Profit And Loss Statement For Small Businesses
Now you understand all the nitty-gritty details surrounding a profit and loss statement and have had a chance to look over our free template; it’s time to discuss what to do after you outgrow it.
You’ll want to create a profit and loss template from scratch that perfectly fits your small business’s needs and all the intricate financial details surrounding your profit and expenses. We’ll cover all the basic information you need to create a custom profit and loss statement, but your business will undoubtedly have some unique financials it needs to track, so be sure to add them along the way.
Here’s what every good profit and loss statement should include:
The revenue section of your profit and loss statement should include every income item that passes through your business. You can record revenue as sales, gross receipts, fees or any other term that describes your operating income. Just make sure the term you use is mirrored across all your financial documents to avoid confusing yourself, your employees and most importantly, your accountant.
Similar to the revenue section of your profit and loss statement, your Expense column should include any money moving out of your business, regardless of where it goes.
- Payments to suppliers
- Service fees (accountants, lawyers, cleaners)
- Marketing/Advertising costs
- Asset depreciation
Regarding asset depreciation, it’s important to ensure that your profit and loss statement includes a comprehensive depreciation list, as this is the only way to get a completely accurate picture of your business’s finances. You can also run a separate depreciation list and feed a single figure into your profit and loss statement. Just make sure the figure is accurate, or it will skew the usefulness of your P&L statement.
Cost Of Goods/Service Sold (COGS)
Every trade business owner will be familiar with COGS. It’s part and parcel of running a business in an industry that uses goods to provide a service. On a profit and loss statement specifically, COGS show the cost of inventory or materials used to create new products or provide a service.
For example, a company buys a raw resource for $30 and then converts it into a product/service that costs $150. The revenue recorded from this sale would be $150, but that’s not the whole story, so we record the $30 of COGS against the $150 of revenue and report a gross profit of $120 to settle the difference.
Gross profit is the difference between revenue and expenses, specifically receipts and COGS. If your business doesn’t carry inventory, profit and receipts are the same and don’t need to be recorded twice.
Net Profit Or Loss
After accounting for taxes, your profit and loss statement needs a final net profit figure to function correctly. Make sure your net profit or loss figure is 100% accurate, as it’s often the first port of call an accountant or finance expert makes when looking over your financial documentation.
After you’ve added a final net profit or loss value to your profit and loss statement, you can finally rest easy, you’ve done the hard part, and now it’s time to reap the rewards of good accounting management.
You can use your profit and loss statement to achieve any number of organisational goals. The possibilities are endless, from seeking investment from third parties to mapping your expenditure for the following year. Get out there and get started!