How to Create a Profit and Loss Statement in 2024

When you’re talking financials and the boss asks, ‘How are we doing?’ — you need an unambiguous answer. Nothing cuts to the fiscal truth faster than a profit and loss statement (P&L).

Typically presented as a table, the P&L gives business owners a snapshot of recent performance. It shows revenues, costs, and overheads with a calculation of net profit. Pretty much at a glance, you’ll know if the business is earning a profit or bleeding red.

Along with cash flow statements and balance sheets, P&Ls complete the triptych of bedrock business documents every seller of goods or services needs to maintain. Together they paint a concise picture of current financial performance, but the P&L is special.

With blunt simplicity, it tells you how much money is coming in, how much is going out the door, and where it’s being spent. Pretty straightforward but more than enough to make smart decisions about the firm’s most profitable activities, biggest costs, and underperforming products.

How to Make a Profit and Loss Statement

P&Ls are usually generated monthly, quarterly, or yearly, so the period covered will affect the number of entries you need to capture in the underlying tables. The top-line figures, though, remain essentially the same.

Here’s a step-by-step guide to creating your own.

Step 1: Capture gross revenue

Adding up all the money you’re making is the natural starting point for a P&L. Income sources are usually tracked in a general ledger under current account categories like cash on hand and the invoices awaiting payment in accounts receivable.

The time frame is important. If you’re creating a P&L for monthly review, only include revenue received or due within the month. It’s the same if you’re generating a quarterly statement. Just add up the revenue received in that three-month period.

Revenue means everything that generates an income for the business — selling products, providing services, or auctioning off used equipment.

Step 2: Capture the cost of sales

Sometimes called ‘cost of goods sold’ or COGS, cost of sales is part of the P&L where you calculate what you’ve spent on less predictable business needs like raw materials or inventory management. These are different from fixed expenses like leases or salaries.

In practice, it means that …

• If you sell sofas, the price you paid to obtain them from the manufacturer is the cost of sales
• If you make sofas yourself, the cost of sales will be what you paid for the materials required to create them
• If you’re selling upholstery services, the cost of sales would include the cost of your time plus the fabrics and materials you purchased to deliver the service.

Step 3: Calculate gross profit

This one is easy. With gross revenue and cost of sales calculated, you just subtract one from the other (revenue minus cost of sales) to arrive at the gross profit figure for the period.

Step 4: Calculate overheads/operating expenses

Now you can add up your business expenses. This means any fixed costs you have to assume in order to operate. This can include rent, payroll, insurance, travel, marketing, order fulfillment, and utility bills.

Step 5: Calculate operating profit

With a total figure for your overhead, you can now calculate operating profit. This measure gives you a sense of whether or not the business is running profitably on a regular basis. To arrive at the figure for total operating profit or loss, use this formula: Gross Profit – Operating Expenses = Operating Profit/Loss.

Step 6: Add other income to establish EBITDA

In addition to the revenue sources listed above, a business might also earn income from interest on assets or dividends from investments. If so, this is where it should be captured. The correct way to use other income is to add it to the operating profit figure. This combined figure gives you total earnings before interest, taxes, depreciation, and amortization (or EBITDA in accounting lingo). Use this formula: (Operating Profit) + (Interest Income + Dividends Earned) = EBITDA.

Step 7: Calculate net profit (or loss)

The final step is to understand what’s left over from gross profit after all overheads and expenses are tallied. To do this you need to make one final calculation of outgoings that captures interest payments, taxes, as well as depreciation and amortization expenses. You subtract this figure from the EBITDA figure above, and the result is your net profit. Use this formula: (EBIDTA) – (Interest + Taxes + Depreciation) = Net Profit/Loss.

Time-saving tip

Of course, you might save yourself some steps by using an accounting software package to build your P&L. For larger businesses, that’s likely a good idea. Smaller businesses can probably get by just fine with an Excel spreadsheet.

What’s an Example of Profit and Loss?

While profit and loss statements follow a predictable structure, there are two different formats you can use: single-step or multiple-step. The one you choose depends on how your business is set up, and each has advantages and disadvantages.

Single-Step P&Ls

A single-step P&L gives you a basic snapshot of revenue, expenses, and bottom-line net income. Your income is calculated at the top of the table, while expenses are calculated at the bottom. For smaller firms, this straightforward approach saves time and effort for the managers and accountants who create the P&L and for anyone who reads them.

For public companies, a single-step P&L allows investors to go straight to the net income figure and quickly assess the company’s overall health.

On the downside, a single-step P&L may be too superficial to accurately capture what’s happening with the business. Because it doesn’t include measures like gross and operating profit, an investor or manager would have to dig deeper to understand where the business is absorbing costs.

Multiple-Step P&Ls

Larger companies often use a multiple-step P&L because there are more costs, overheads, and revenue streams impacting profitability. A multi-step P&L categorizes expenses as either direct or indirect costs.

• Direct costs refer to the price paid for something specific, like a product or service.
• Indirect costs are more generalized expenses that can’t easily be allocated to a specific good.

These can include research and development, salaries, recruitment advertising, fees for professional services like legal and accounting, power bills, rents, and subscriptions.

By providing a more granular breakdown of costs and revenues, multiple-step P&Ls facilitate a deeper analysis of the firm’s financial position, particularly when it comes to measuring the costs of goods sold. It also simplifies comparisons between gross, operating, and net profitability.

But those advantages also add time and complexity to the process. Multiple-step P&Ls require more entries and take accounting teams longer to produce. Each entry has to be carefully categorized and entered accurately. Any error could affect the overall calculation and lead to inaccurate assumptions. This can muddy the waters when decisions have to be made about cutting costs or spending more to grow the business.

Balance Sheets Vs. Profit and Loss Statements

P&Ls are sometimes referred to as ‘income statements,’ which can lead to confusion with balance sheets — another of the three core financial documents every business needs to maintain.

A balance sheet performs a different task. It snapshots a business’s assets, equity, and debts in one place, while a P&L statement snapshots the business’s overall performance.

It’s an important distinction. A profit and loss statement captures what’s happened over a given period of time. A balance sheet looks at the value of the business on a given date. In practical terms, it means that some calculations should be recorded on a balance sheet while others should be left to the P&L.

The balance sheet should capture three things:

1. Assets — These are all the things the business owns, including real estate, equipment, and cash in the bank, plus invoices awaiting payment.
2. Liabilities — These are the debts the business has to pay, including any expenses, loans, or bills waiting to be paid in accounts payable.
3. Equity — After subtracting liabilities from assets, this is the value of the business the owner can claim or declare.

Completing a balance sheet is a prerequisite for creating the third essential finance document: the cash flow statement. It monitors the cash flowing in and out of the business, ensures there’s enough money in the bank to pay monthly bills, and shows how well the business is bringing in money.

Benefits of a Profit and Loss Statement

The profit and loss statement is an effective tool that breaks down your company’s financial performance in a way that’s clear and easy to digest. To grow sustainably over the long term, you need to know how you’re doing. Assessing business performance objectively enables you to improve. For example:

• The P&L’s revenue figure could reveal that a sales channel isn’t performing as you’d hoped
• You could discover that the amount spent on marketing is increasing, but revenues haven’t risen as a result.
• A look at operating expenses could show that shipping costs are rapidly increasing, and you may need to find a new supplier

Your P&L exposes financial strengths and weaknesses and helps you identify specific areas for improvement.

Make better business decisions

With an up-to-date P&L, you’ll be able to quickly review how the business fared over a month, quarter, or year. You can compare actual performance with projected and use what you learn to generate better forecasts. You can also see how you measure up against other companies in the same sector.

Demonstrate success

If you can demonstrate how your business is doing financially, you’ll be in a better position to negotiate contracts, deal with investors, and give potential customers confidence that the firm is successful and likely to be around next year.

Make tax filings easier

It’s a well-known fact that the burden of gathering figures during tax season hits many small businesses hard. Updating profit and loss statements on a regular schedule means you’ll have everything ready when the time comes to submit. Breaking the process up into structured monthly or quarterly pieces makes that year-end filing much easier to execute.

Conclusion

A well-structured profit and loss statement is an invaluable management tool. It tells you in a flash where you’re business is doing great, and where you could do better — without having to summon an accountant. When you’re dealing with banks and investors, having one is an absolute must.

Knowing how to create (and read) a P&L is key to making informed business decisions — especially as it shows you where you’re already doing well and where you might be able to cut costs.

For more tools and tutorials to help you with your business’s finance-related tasks, check out Techpedia’s accounting software guides.

FAQs