profit and loss statement business plan

How to Create a Profit and Loss Statement

By Andy Marker | March 18, 2022

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In this article, you’ll learn about profit and loss statements and find tips on using an income statement for your financial strategy, including expert advice for small businesses. Plus, we’ll guide you through writing a P&L statement.

Included on this page, you’ll find the essentials of a profit and loss statement , step-by-step instructions for preparing a P&L statement with examples , free small business templates , and a helpful checklist .

What Is a Profit and Loss Statement?

A profit and loss statemen t is a financial document that details your business’s revenue, expenses, and net income over a month, quarter, or year. It captures how money flows in and out of your business. 

 A profit and loss statement is also called an income statement , a statement of profit , or a profit and loss report . Creating one is a standard way to compile historical data for your business to tell its financial story over time. Each monthly or quarterly reporting period, analyze the data vertically to see your business's monetary resource allocation. Over time, you will also analyze the data horizontally in context with other profit and loss statements to help you to make informed financial decisions and forecasts. You can also use the same technique to understand other businesses' finances.

Why Do You Need a Profit and Loss Statement?

You need a profit and loss statement to make the most informed choices for your business strategy. As an honest reflection of how your money works in your business, the statement shows what changes need to happen to increase profit.

Ivanka Menken, Managing Director and Co-founder of The Art of Service , emphasizes the importance of a P&L statement: “The numbers don't lie. [A profit and loss statement is] important to truly understand your business’s revenue and profit numbers to know if your revenue is helping or hurting your profitability. Many businesses go broke, especially when the focus is solely on revenue, [and not on] the cost of sales or the profitability of activities.” 

 A profit and loss statement helps you see exactly how money flows into your business, where you spend that revenue, and what adjustments you need to maximize profit. For example, you may discover that your cost of goods sold (COGS) is too high and needs to be reduced with a less expensive production option. By making changes to improve your margins, you can increase net revenue for the following months. Once you implement the new plan, you can measure its impact over time with the data from future P&L statements.

 Additionally, a P&L statement is necessary to prove that your business is a trustworthy, solid investment. Financial backers or investors contributing capital to the business, banks at which you’re applying for a loan, or buyers interested in the business can use the document to determine your business’s capability to make a profit and view your financial trends over time. Essentially, the profit and loss statement showcases your ability to identify complex business problems and articulate how you solved them from a financial standpoint.

What Can a Profit and Loss Statement Tell You About Your Business?

Profit and loss statements show your business health over time. A reported loss signals that something isn’t functioning correctly within the business. After analyzing the document, you can pinpoint the cause of the loss and develop a stronger business strategy. 

When comparing the statements in the context of other periods, you can clearly identify business areas that are performing well and those that need to be optimized.

Pam Prior, speaker, podcaster, and creator of Profit Concierge , shares an essential tip: “Do something with the information. Knowing history for history’s sake doesn’t do much for you.” Once you record, report, and analyze the information based on 12 months of history, you can use formulas to project the next 12 months. Your P&L statements are the basis of financial forecasting for the following year.  

Your income statement is the most important financial statement for your business. Use it, along with one of our free small business budget templates , to simplify and strengthen your small business financial planning.

What Goes on a Profit and Loss Statement?

A profit and loss statement contains three basic elements: revenue, expenses, and net income. More advanced profit and loss statements also include operating profit and earnings before interest, taxes, depreciation, and amortization (EBITDA). 

 Basic income statements contain the following elements: 

• Gross Revenue: The amount of money you received as payment for your products or services (also called gross sales ). 
• Cost of Goods Sold (COGS): Expenses for everything involved in creating your product, such as manufacturing materials, contractors, etc. Note that COGS does not include your operating expenses (i.e., salaries, facility rent).  
• Net Revenue: The gross revenue minus COGS; also known as gross profit or gross income . 
• Expenses: This refers to any fixed or operating expenses required to run the business, including salaried employees, rent, advertising and marketing expenses, utilities, and insurance. A basic statement accounts for interest, taxes, depreciation, and amortization as part of the total expenses. Use a small business expense template to easily itemize your expenses.  
• Net Profit: Also called net income , this is the net revenue minus the total expenses. If the calculation is negative, it is called a loss or a net loss . Pro Tip: Menken advises that companies avoid getting too detailed and granular when creating a profit and loss statement, as doing so can defeat the document’s purpose. Use a small business profit and loss template if you are less familiar with spreadsheet software. As your company grows, so will the complexity of your profit and loss statement — in time, you can transition to more advanced profit and loss templates, which typically include more information, such as the following: 
• Operating Profit: The profit before interest or taxes and after accounting for general costs. Subtract the operating expenses from the net revenue to calculate this figure. 
• Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): This line measures the business’s profitability and compares companies with each other. This figure is commonly used for corporations and large public companies. In some cases,, you may only calculate EBIT, meaning the operating profit plus depreciation and amortization. 
• Additional Income: This includes anything not calculated in revenue, such as interest income, dividends, and donations. Pro Tip: As Prior shares, “Everything you need to create a basic profit and loss statement is already on your bank statement and credit card statement. As your business grows or for more complicated businesses, outsource to a bookkeeper as soon as you can afford one. You won’t have to clean up mistakes, saving money over the long run.”

How Do You Prepare a Profit and Loss Statement?

Preparing a profit and loss statement involves two multi-stage steps. First, find your gross profit by subtracting your COGS from your gross revenue. Then, subtract your total expenses from the gross profit to calculate the net income.  

Before you start, gather the necessary documents. For a basic P&L statement, you only need your credit card and bank account statements. Supplement these documents with invoices, receipts, and other transactions not listed on your credit card or bank statements.  

To get started, you’ll need to know the basic formulas. Use our quick-reference guide below until you are familiar with the formulas. We’ve also indicated when to use each formula in our step-by-step instructions for preparing a basic profit and loss statement. 

1. Calculate Gross Profit

You can calculate your gross profit by taking the sum of the gross revenue and subtracting the COGS. These figures are pre-tax amounts. Use the following formula to find the gross profit:  

Gross Profit = Gross Revenue - COGS 

• Total your gross revenue from sales and other pre-tax income and create a line item for the total amount. 
• Total your COGS and create a line item for this figure. Pro Tip: Menken recommends that businesses look at the income and expense lines and consider if they are a cost of sales or an expense. Understanding the difference will help you know where you can save money (by lowering your expenses) and where you need to increase investments to increase revenue. The difference between costs and expenses is as follows: A cost refers to a payment made toward the production of the goods you sell, and an expense refers to a fixed monthly cost that is necessary for business operations, such as rent, salaries, and utilities. Generally, expenses are recurring payments and costs are one-time payments.
• Subtract COGS from the gross revenue to find your gross profit. If the number is negative, your business has incurred a loss for this period.

2. Total All Expenses

In this example, since we are preparing a basic small business profit and loss statement, we will simplify the expenses by including the operating and non-operating expenses. 

• Itemize your operating expenses (salaried employees, facilities, marketing, etc.) and non-operating expenses (interest, depreciation, taxes, amortization).
• Total all expenses as a separate line item. Note: As your business grows and becomes more complex, so will your financial documents. You may wish to expand your income statement to itemize the EBIT or EBITDA separately as a way to compare your business profit with competitors. Pro Tip: Prior advises statement preparers to use itemized categories (i.e., contractor payments, travel, software, marketing) to help you see how they perform over time and how the money spent generates more net profit. 

3. Calculate Net Income 

The final step is to calculate the net income (also called net earnings ) using the following formula:

Net Income = Gross Profit – Total Expenses

• Subtract your total expenses from the gross profit to find your net income.
• List this figure on a separate line. Pro Tip: Menken advises, “If you feel overwhelmed by all these numbers, then make it simple. Take the aggregate numbers for your income, cost of sales, and expenses. You’ll then have a five-line overview of your business. From there, you can drill down into more detail when you are ready for more information. ”You can use any spreadsheet tool to create a profit and loss statement that automatically performs calculations. You can also use a template that contains built-in calculations. To get started, visit our step-by-step tutorial on how to create a profit and loss statement in Excel.

Profit and Loss Statement Template Example

Download Profit and Loss Template Example — Microsoft Excel

To help you create a profit and loss statement, we’ve filled out a free small business profit and loss statement as an example. Download the fully customizable example template to see how the numbers work and fill in your own figures. 

You can also visit our profit and loss templates page to find the free template that best meets your needs.

How Often Do You Prepare a Profit and Loss Statement?

Businesses routinely prepare a profit and loss statement each month, quarter, or year. As a standard, many organizations prepare the statement monthly to line up with bank cycles. 

Pam Prior highly recommends monthly statements: “The standard is monthly because banks tend to cycle each month. Essentially, you’re taking the info from the bank and credit card statements and putting it into a format to see what you made and what you spent. When you do this monthly, you have 12 data points over the course of a year, versus four quarterly or one annual report. Since data informs decisions, 12 points of data provide the most clarity.”

Startups and new businesses that do not have a financial history use a pro forma financial statement instead of a profit and loss statement. The pro forma is a projection of finances and is necessary when you are applying for business financial backing.

How to Read a Profit and Loss Statement

To read a profit and loss statement, you must first identify the preparation method: accrual or cash basis. Next, scan the document to review the finances during a single period. Then, analyze the trends over time by comparing data from other P&L statements.

Preparers typically use one of two primary reporting methods on the income statement:

• Accrual Basis: In this method, you report income and expenses on the income statement as they occur. For example, you would record the sale of a single product upon delivery to a customer who promises to pay in the future.
• Cash Basis: Here, you report income and expenses on the income statement at the time of the transaction. For example, you would record the sale of a single product or service only when money for that product has exchanged hands.  

The accrual method is most common in publicly traded companies and is more accurate in reporting the overall health of the company. The cash method is common for personal finances and small businesses and is much simpler, especially when you’re starting out.

Pro Tip: Prior urges new businesses to start preparing income statements using the cash basis method.

To determine the profit margin, we’ve detailed the common formulas and how to use them with your income statement data below: 

Vertical (Common-Size) Analysis

A vertical or common-size analysis is a financial tool analysts use to interpret financial documents like a profit and loss statement. The method calculates major line items (gross profit, operating profit, and net profit) from your income statement as a percentage of its base line item (gross revenue). These percentages are called margins . Analyzing the document using profit margins allows you to understand the impact of each reporting period for your business, and also produces relative terms to accurately compare your company’s finances to other companies, regardless of their scale.

• Scan the Document: Look at the big picture by reviewing the net revenue, expenses, and net income. Note if anything looks surprising, and then scan the statement line by line to gain a general understanding of how finances performed for that particular period. 
• Gross Revenue: $20,000
• Cost of Goods Sold: $15,000
• Operating Expenses: $1,000
• *Non-operating Expenses: $500
• *Non-operating expenses include interest, taxes, depreciation, and amortization. They should be itemized individually on the statement.
• Gross Profit Margin: This is the profit your business made relative to what it costs to produce them. Remember that gross profit equals gross revenue minus COGS. The formula to find your gross profit margin is as follows: Gross Profit Margin = (Gross profitGross revenue) x 100 
• Gross Profit Margin Example: If you paid $15,000 for goods and sold them at $20,000, your gross profit will be $5,000. To find the gross profit margin, divide the gross profit ($5,000) by the gross revenue ($20,000) and multiply that number by 100 to get the percentage. Your gross profit margin for this example is 25 percent. 
• Operating Profit Margin: The percentage of expenditures it takes to operate your business (i.e., marketing and PR costs, salaries, taxes, interest, supplies, vendor and contractor payment, professional fees, such as accountants and lawyers) in relation to the revenue. Your operating profit does not include non-operating expenses (interest, taxes, depreciation, and amortization) and only uses the EBITDA to determine this margin. Remember that operating profit equals gross revenue minus (COGS + operating expenses). The formula to find the operating profit margin is as follows: Operating Profit Margin  = (Operating profitGross revenue) x 100
• Operating Profit Margin Example: If your operating costs were an additional $1,000 on top of the COGS ($15,000) and you subtract it from your gross revenue ($20,000), your operating profit is $4,000. Divide your operating profit ($4,000) by the gross revenue ($20,000) and multiply it by 100. Your operating profit margin in this example is 20 percent. 
• Net Profit Margin: This formula calculates all expenses from revenue, including COGS, operating expenses, taxes, interest, depreciation, and amortization in relation to the total revenue. Remember that net profit equals gross revenue minus total expenses. The formula is as follows: Net Profit Margin = (Net profitGross revenue) x 100
• Net Profit Margin Example: Using the same figures from the previous examples and assuming that your taxes, interest, depreciation, and amortization were $500 in addition to the $1,000 operating expenses, we’ll input the numbers into the calculation for net profit: Net Profit = [(Gross Revenue – COGS) - (operating expenses + taxes, interest, depreciation, amortization)] [($20,000 - $15,000) – ($1,000 + $500)] = $3,500 Divide your net profit ($3,500) by the gross revenue ($20,000) and multiply it by 100. Your net profit margin is 17.5 percent. 
• Analyze the Profit Margins: Look closely at individual lines in each section (gross revenue/sales, COGS, net profit, expenses, and net income). What needs to happen to increase your margins? Can you lower COGS or operating expenses without compromising your product or company values? What needs to happen to increase sales? Did something go particularly well for this month? Try to replicate it for the following month. Compare the line items to determine where to strategically adjust.  

Horizontal (Serial) Analysis

After analyzing the document vertically, compare the statements month to month (or quarter to quarter or year to year) horizontally to see the story of where the money is going. Place your net profit margins on a graph to see the information in context. You’ll discover big-picture insights, general business trends, and increasing or decreasing profit margins. You can use this information to forecast your business direction and compare it with other companies’ public financial statements.  

Financial expert Prior says, “The really cool thing is when you see a profit and loss statement in columns that show each month. This system shows your financial story over time. This way, you can see if the money you’re spending is working for you and generating revenue — profit is the whole point of business. Once you have this piece in place, you can make informed decisions on what to do next. You’ve got the data to interpret, develop a strategy, and measure its impact.”

 Beyond the basic steps of reading and analyzing a P&L statement, it is important to keep outside factors in mind to develop insights for your strategy. Read your profit and loss statement like you would a story. Ask questions when something isn’t adding up as expected. As you read the statement, consider in your strategy the following factors: 

• Seasonality: The time of year impacts a number of areas on your statement. Items may be more expensive during a specific period, thereby increasing the COGS. Holidays can increase sales with demand. By including seasonality, you can interpret dramatic changes and develop creative solutions to create more income during off seasons.  
• Income Sources and New Offerings: If your business has expanded its offerings, are they worth the resources you’re putting into them? Are the profit margins high enough to keep the offerings? Do you need to shift more money to market the product and increase sales? Your profit and loss statement helps guide the best choices about how well your new product performs.
• Bottom Line: Typically, the COGS increases with revenue. If you see that the COGS exceeds revenue, you need to make immediate decisions to change a loss into a profit. To increase your bottom line, ask if there’s any way you can reduce these expenses without jeopardizing the quality of product or company values. 
• Big Picture: Look at your net income as the big picture. For example, it is cost-effective to purchase items in bulk for the year. Still, it will appear negative on the income statement for a particular month. Ultimately, you’ll recoup the money over time for higher margins, but you need to keep an eye on the big picture to see this in the income statement.

Profit and Loss Statement Checklist

Download Free Profit & Loss Statement Checklist Microsoft Word | Adobe PDF | Google Docs

Whether you are just beginning to prepare your profit and loss statement or are analyzing profit and loss statements vertically or horizontally, use our quick reference checklist to ensure you don’t miss a step. This complete checklist includes quick reference income statements and profit margin formulas to help you cover all your bases.

Balance Sheet vs. Profit and Loss Statement

A balance sheet is different from a profit and loss statement. It captures a snapshot of the business’s assets, debts, and equity in a single moment, whereas a P&L statement demonstrates the performance of the overall business. 

Pam continues, “A profit and loss statement tells you what happens over a period of time. A balance sheet is a record or a snapshot in time as of a certain date, of the values of the things in the business. It’s critical to know if something belongs on a balance sheet or a profit and loss statement.”

 All balance sheets calculate the owner’s (or shareholder) equity by assessing the company assets against its liabilities: 

• Assets: What your business owns, including tangible items like cash, investments, and owned property, as well as prepaid expenses known as accounts receivable . 
• Liabilities: These are items that your business owes, including any loans, accrued expenses, accounts payable, etc.  
• Owner’s Equity: This is the amount that the owner of a private company has after subtracting liabilities from assets. This is called shareholder equity for public companies. 

The balance sheet is also a supporting document when creating a cash flow statement . The cash flow statement is another financial document that monitors cash flow in and out of the business, sufficient funds for bills, and how well the business generates money.

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Profit and Loss Statements 101 (with Template)

Bryce Warnes

Reviewed by

Janet Berry-Johnson, CPA

April 26, 2024

This article is Tax Professional approved

Want to know how profitable your business is? The best way to find out is to create a profit and loss statement.

Here’s how you put one together, how to read it, and why profit and loss statements are important for running your business.

I am the text that will be copied.

What is a profit and loss statement?

A P&L statement (sometimes called a statement of operations) is a type of financial report that tells you how profitable your business was over a given period. It shows your revenue, minus expenses and losses. The result is either your final profit (if things went well) or loss .

The P&L statement is one of the three most important financial statements for business owners, along with the balance sheet and the cash flow statement (or statement of cash flows).

One of the most common reasons small businesses start producing profit and loss statements is to show banks and investors how profitable their business is.

When profit and loss statements are meant to be shared outside a business, they’re called income statements. A P&L statement is for internal use only. Other than that, the two statements are essentially the same.

Profit and loss statement example

We’ve created a profit and loss statement for an imaginary small business—Terracotta Warriors, a supplies store for potted plant enthusiasts.

Terracotta Warriors Inc.

Income Statement

For Year Ended Dec. 31, 2021

Profit and loss statements should be read top to bottom—so we’ll go through this one line by line, starting at the first.

Further reading: How to Read (and Understand) an Income Statement

Sales revenue

Every profit and loss statement starts off by showing your company’s revenues.

How you calculate your revenue depends on whether you do cash or accrual accounting and how your company recognizes revenue —particularly if you’re tracking income for a single month (rather than a year, as part of an annual report.)

The sales revenue line simply represents your total revenue for the time period you’re reporting. (In this case, it’s the year ending on December 31, 2021.)

Cost of goods sold

Abbreviated as “ COGS ,” this is the cost of producing the goods or services you sold to your customers during the reporting period.

COGS involves only direct expenses: Raw materials, labor, and shipping costs. In the case of Terracotta Warriors, that might include planting pots (purchased wholesale), wages for employees, and the cost of shipping online orders.

Indirect expenses—for instance, utilities, bank fees, and rent—aren’t included in COGS. Those go into a separate category.

Gross profit

When you subtract COGS from your sales revenue, you get gross profit . This number tells you how profitable your business is after taking into account direct costs, but before taking into account overhead costs . You can consider it a rough measure of how your business is performing.

General expenses

Also referred to as “operating expenses,” general expenses include rent, bank & ATM fees, equipment expenses, the cost of marketing & advertising, merchant fees, and any other expenses you incur in order to keep your business running.

Some profit and loss statements will bundle these and similar expenses together into one broad category: Selling, General & Administrative Expenses (SG&A). In our example, though, they’re broken out into individual line items.

Operating earnings

Once you take into account all internal costs, you get your operating earnings. It’s a measure of how profitable your business is, without taking into account external costs, like interest payments, taxes, depreciation, and amortization. Operating earnings is sometimes called EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).

You have considerably more control over your internal costs than your external—taxes, interest payments, and other expenses are partly determined by the work of financial professionals. For that reason, many accountants consider EBITDA the best measure of how a business is performing.

Operating earnings are sometimes called operating profit or operating income. And EBITDA are sometimes referred to as non-operating expenses.

Interest expense

If your business has a loan, line of credit , or credit card, it’s likely you need to make monthly interest payments. Your interest expenses are the total interest payments you made to creditors for the period covered by the income statement.

Earnings before income tax

This line shows your business’ profitability before it pays its taxes.

Income tax expense

This is how much tax you paid on your income.

This is where the term “bottom line” comes from. The bottom line of the profit and loss statement is your net earnings—the total profit for your business, taking into account all internal and external expenses.

Profit and loss statement template

If you have a bookkeeper or accountant, they may already generate P&L/income statements for you. Likewise, many types of accounting software will automatically generate useable income statements, so long as you accurately categorize all your transactions.

Want to take a DIY approach? Our expert bookkeepers here at Bench have built a profit and loss statement template in Excel. You can use it to turn your business’ financial information into a P&L statement.

What is a single-step P&L statement?

The profit and loss statement above is technically called a “multi-step” P&L statement. That’s because you have to perform multiple calculations in order to arrive at your final net income. (In this case, we calculated gross profit, then subtracted general expenses, then subtracted interest, and then income tax expenses.)

A single-step profit and loss statement is a bit more straightforward. It adds up your total revenue, then subtracts your total expenses, and gives you your net income. Simple.

We created an example single-step profit and loss statement for another hypothetical company, the Pot Barn:

The Pot Barn Inc.

Profit and Loss Statement

The single-step format is good at giving you a snapshot of your company’s profitability, and not much else. That’s why it’s not as common as the multi-step P&L statement. But if you’d like a super simple method of calculating your business’ profitability, single-step is the ticket.

What is a common size profit and loss statement?

Common size profit and loss statements include an extra column of data summarizing each line item as a percentage of your total revenue.

Here’s the profit and loss statement for Terracotta Warriors Inc., done up this time as a common size P&L statement:

Common size profit and loss statements can help you compare trends and changes in your business.

For example: if your Operating Earnings change from $21,052.44 to $23,443.33, that might not tell you much by itself, because other numbers might have changed as well. But if your Operating Earnings increase from 36.90% to 44.23%, that’s a concrete, significant change in your business.

How to analyze a profit and loss statement

While it can seem like a daunting pile of numbers, knowing how to review a P and L statement can show you how your business is evolving over time and when it has been most profitable. It can also help you uncover any potential issues with your cash flow.

1. Check your bottom line

Curious how your business is doing? Check your bottom line.

The last line of your P&L indicates whether you’re “in the black” (earnings were greater than expenses) or “in the red” (expenses were greater than earnings).

While a net profit is always something to celebrate, a net loss doesn’t always mean your business is in trouble, especially when first starting out. However, it can indicate any areas that might need attention to ensure losses don’t become a pattern.

2. Check your income streams and expenses

Once you know whether your business has made money or not, it’s a good idea to take a closer look at your income streams and expenses.

Are your revenue sources in line with your business goals? Are they a one-time or continuous increase? It’s good to know if a surge in profit came from gradual growth or a specific event or promotion.

On the other hand, do your expenses make sense for the time period examined? Some costs like rent and utilities might be fixed, while others like supplies or wages could vary.

If your business had a net loss, it’s good to see if you can reduce any ongoing costs or if they were necessary for that time period (i.e., increased inventory for the holidays, planned expansion, etc.).

3. Compare your numbers

It’s important to compare your P&L statement to previous periods to see if your profit or loss is a trend or an anomaly.

Examining the percentage of change in each category can help you determine if you’re on track to meet your goals. Even though a large percentage jump in earnings may seem positive at first glance, if the same period the year prior had very low income, the growth might not be as significant. The same might also be true for expenses.

Once you’ve made your comparisons, you will have a better idea of what’s working or not for your business and if you need to make any changes moving forward.

4. Double-check your math

If you’re working in an Excel spreadsheet to build and review your P&L statement, be sure to double-check your numbers to make sure you didn’t miss anything or accidentally change a formula. Sometimes, manual data entry can lead to mistakes that affect your bottom line. Reviewing your previous statements can also help in this process.

Profit and loss statement vs. balance sheet: what’s the difference?

A balance sheet shows you how much you have (assets), how much you owe (liabilities), and how much is left over (equity). It’s a snapshot of your whole business as it stands at a specific point in time.

A profit and loss statement describes how profitable your business is. It shows you how much money flowed into and out of your business over a certain period of time.

Further reading: Income Statements vs. Balance Sheets

How Bench can help

An up-to-date profit and loss statement helps you keep an eye on your business’s financial health so you can identify cash flow issues before they become a problem.

Your Bench account’s Overview page offers an at-a-glance profit and loss statement, allowing you to review your profitability and stay on top of your top expenses from month to month. Spend less time figuring out your profitability and more time optimizing it with Bench. Learn more .

A DIY approach to profit and loss statements

Interested in generating your own P&L statement to track cash flow and expenses for your small business? Try our profit and loss statement Excel template . It’s free to download, and you can customize it using your business numbers to make examining your company’s performance easier.

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Planning, Startups, Stories

Tim berry on business planning, starting and growing your business, and having a life in the meantime., standard business plan financials: projected profit and loss.

Continuing with my series here on standard business plan financials, all taken from my Lean Business Planning site, the Profit and Loss, also called Income Statement, is probably the most standard of all financial statements. And the projected profit and loss, or projected income (or pro-forma profit and loss or pro-forma income) is also the most standard of the financial projections in a business plan.

• It starts with Sales, which is why business people who like buzzwords will sometimes refer to sales as “the top line.”
• It then shows Direct Costs (or COGS, or Unit Costs).
• Then Gross Margin, Sales less Direct Costs.
• Then operating expenses.
• Gross margin less operating expenses is gross profit, also called EBITDA for “earnings before interest, taxes, depreciation and amortization.” I use EBITDA instead of the more traditional EBIT (earnings before interest and taxes). I explained that choice and depreciation and amortization as well in Financial Projection Tips and Traps , in the previous section.
• Then it shows depreciation, interest expenses, and then taxes…
• Then, at the very bottom, Net Profit; this is why so many people refer to net profit as “the bottom line,” which has also come to mean the conclusion, or main point, in a discussion.

The following illustration shows a simple Projected Profit and Loss for the bicycle store I’ve been using as an example. This example doesn’t divide operating expenses into categories. The format and math start with sales at the top. You’ll find that same basic layout in everything from small business accounting statements to the financial disclosures of large enterprises whose stock is traded on public markets. Companies vary widely on how much detail they include. And projections are always different from statements, because of Planning not accounting . But still this is standard.

A lean business plan will normally include sales, costs of sales, and expenses. To take it from there to a more formal projected Profit and Loss is a matter of collecting forecasts from the lean plan. The sales and costs of sales go at the top, then operating expenses. Calculating net profit is simple math.

Keep your assumptions simple. Remember our principle about planning and accounting. Don’t try to calculate interest based on a complex series of debt instruments; just average your interest over the projected debt. Don’t try to do graduated tax rates; use an average tax percentage for a profitable company.

Notice that the Profit and Loss involves only four of the Six Key Financial Terms . While a Profit and Loss Statement or Projected Profit and Loss affects the Balance Sheet because earnings are part of capital, it includes only sales, costs, expenses, and profit.

Hi, In case of bank financing for machineries and working capital, how can it be broken down in to the expense stream? ( capital + interest)

When you spend on assets is not deductible from income, and is therefore not an expense. What you spent to repay the principle of a loan is not deductible, and therefore not an expense. The interest on a loan is deductible, and is an expense.

Excuse me, may I know if the project profit & loss should plan for the first year only or for year 1-3 in business plan of a new company?

Kattie Wan, I recommend for normal cases the projected profit and loss monthly for the first 12 months, and two years annually after that. There are always special cases, though; every business is different.

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How to Create a Profit and Loss Forecast

Angelique O'Rourke

7 min. read

Updated October 27, 2023

An income statement, also called a profit and loss statement (or P&L), is a fundamental tool for understanding how the revenue and expenses of your business stack up.

Simply put, it tells anyone at-a-glance if your business is profitable or not. Typically, an income statement is a list of revenue and expenses, with the company’s net profit listed at the end (check out the  section on income statement examples below  to see what it looks like). 

Have you ever heard someone refer to a company’s “bottom line”? They’re talking about the last line in an income statement, the one that tells a reader the net profit of a company, or how profitable the company is over a given period of time (usually quarterly or annually) after all expenses have been accounted for.

This is the “profit” referred to when people say “profit and loss statement,” or what the “p” stands for in “P & L.” The “loss” is what happens when your expenses exceed your revenue; when a company is not profitable and therefore running at a loss.

As you read on, keep in mind that cash and profits aren’t the same thing. For more on how they’re different,  check out this article .

What’s included in an income statement?

The top line of your profit and loss statement will be the money that you have coming in, or your revenue from sales. This number should be your initial revenue from sales without any deductions.

The top line of your income statement is really just as important as the bottom line; all of the direct costs and expenses will be taken out of this beginning number. The smaller it is, the smaller the expenses have to be if you’re going to stay in the black.

If you’re  writing a business plan  document and don’t yet have money coming in, you might be wondering how you would arrive at a sales number for a financial forecast. It’s normal for the financials of a business plan to be your best educated guess at what the next few years of numbers will be. No one can predict the future, but you can make a reasonable plan.

Check out this article about forecasting sales  for more information.

Direct costs

Direct costs, also referred to as the cost of goods sold, or COGS, is just what it sounds like: How much does it cost you to make the product or deliver the service related to that sale? You wouldn’t include items such as rent for an office space in this area, but the things that directly contribute to the product you sell.

For example, to a bookstore, the direct cost of sales is what the store paid for the books it sold; but to a publisher, its direct costs include authors’ royalties, printing, paper, and ink. A manufacturer’s direct costs include materials and labor. A reseller’s direct costs are what the reseller paid to purchase the products it’s selling.

If you only sell services, it’s possible that you have no direct costs or very low direct costs as a percentage of sales; but even accountants and attorneys have subcontractors, research, and photocopying that can be included in direct costs.

Here’s a simple rule of thumb to distinguish between direct costs and regular expenses: If you pay for something, regardless of whether you make 1 sale or 100 sales, that’s a regular expense. Think salaries, utilities, insurance, and rent. If you only pay for something when you make a sale, that’s a direct cost. Think inventory and paper reports you deliver to clients.

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Gross margin

Gross margin is also referred to as gross profit. This number refers to the difference between the revenue and direct costs on your income statement.

Revenue – Direct Costs = Gross Margin

This number is very important because it conveys two critical pieces of information: 1.) how much of your revenue is being funneled into direct costs (the smaller the number, the better), and 2.) how much you have left over for all of the company’s other expenses. If the number after direct costs is smaller than the total of your operating expenses, you’ll know immediately that you’re not profitable.

Operating expenses

Operating expenses are where you list all of your regular expenses as line items, excluding your costs of goods sold.

So, you have to take stock of everything else your company pays for to keep the doors open: rent, payroll, utilities, marketing—include all of those fixed expenses here.

Remember that each individual purchase doesn’t need its own line item. For ease of reading, it’s better to group things together into categories of expenses—for example, office supplies, or advertising costs.

Operating income

Operating income is also referred to as EBITDA, or earnings before interest, taxes, depreciation, and amortization. You calculate your operating income by subtracting your total operating expenses from your gross margin.

Gross Margin – Operating Expenses = Operating Income

Operating income is considered the most reliable number reflecting a company’s profitability. As such, this is a line item to keep your eye on, especially if you’re  presenting to investors . Is it a number that inspires confidence?

This is fairly straightforward—here you would include any interest payments that the company is making on its loans. If this doesn’t apply to you, skip it.

Depreciation and amortization

These are non-cash expenses associated with your assets, both tangible and intangible. Depreciation is an accounting concept based on the idea that over time, a tangible asset, like a car or piece of machinery, loses its value, or depreciates. After several years, the asset will be worth less and you record that change in value as an expense on your P&L.

With intangible assets, you’ll use a concept called amortization to write off their cost over time. An example here would be a copyright or patent that your business might purchase from another company. If the patent lasts for 20 years and it cost your company $1 million to purchase the patent, you would then expense 1/20th of the cost every year for the life of the patent. This expense for an intangible asset would be included in the amortization row of the income statement.

This will reflect the income tax amount that has been paid, or the amount that you expect to pay, depending on whether you are recording planned or actual values. Some companies  set aside an estimated amount of money  to cover this expected expense.

Total expenses

Total expenses is exactly what it sounds like: it’s the total of all of your expenses, including interest, taxes, depreciation, and amortization.

The simplest way to calculate your total expenses is to just take your direct costs, add operating expenses, and then add the additional expenses of interest, taxes, depreciation, and amortization:

Total Expenses = Direct Costs + Operating Expenses + Interest + Taxes + Depreciation + Amortization

Net profit, also referred to as net income or net earnings, is the proverbial bottom line. This is the at-a-glance factor that will determine the answer to the question, are you in the red? You calculate net profit by subtracting total expenses from revenue:

Net Profit = Revenue – Total Expenses

Remember that this number started at the top line, with your revenue from sales. Then everything else was taken out of that initial sum. If this number is negative, you’ll know that you’re running at a loss. Either your expenses are too high, you’re revenue is in a slump, or both—and it might be time to reevaluate strategy.

• Income statement examples

Because the terminology surrounding income statements is variable and all businesses are different, not all of them will look exactly the same, but the core information of revenue minus all expenses (including direct costs) equals profit will be present in each one.

Here is an income statement from Nike, to give you a general idea:

An  income statement from Nike .

As you can see, while Nike uses a variety of terms to explain what their expenses are and name each line item as clearly as possible, the takeaway is still the bottom line, their net income.

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Angelique is a skilled writer, editor, and social media specialist, as well as an actor and model with a demonstrated history of theater, film, commercial and print work.

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Profit and loss statements explained (+ templates and examples)

Wouldn’t it be great if you could know what the future holds for your business? 

Well, you kind of can, and we aren’t talking about magic here! 

What we’re referring to is the profit and loss statement (P&L), which gives you insight into how well your business is doing. Or how badly , for that matter.

In fact, experts consider a profit and loss statement one of the most common financial documents in any sector and business plan. You may even call it mission-critical.

In this in-depth guide, we’ll cover the essential elements of profit and loss statements, including:

• Profit and loss statements most common types,
• Examples of profit and loss statements, 
• Profit and loss statement templates, 
• Tested tips for making better P&L statements, and more.

Let’s start with a few general remarks that you need to know first!

Table of Contents

What is a profit and loss statement?

A profit and loss statement is a financial statement that typically covers the following items:

• Revenues, 
• Costs, and 

Moreover, a profit and loss statement usually consists of company revenues, costs, and expenses within a specific period, like a month, a quarter, a fiscal year — or even a week.

When done properly, a P&L can help protect the financial bottom line of a company by offering deeper insights into how a business can reduce costs and increase revenue.

In other words, a profit and loss statement is a handy tool that allows you to scrutinize the financial health (or lack thereof) of your company.

Interestingly, a P&L statement goes by many names, depending on the experts you talk to. Here’s a quick list of some of the terms:

• Expense statement,
• Statement of profit and loss,
• Income statement, etc.

In any case, P&L statements summarize a company’s revenues, expenses, and costs in one form or another and are typically performed by in-house or outsourced accountants. But, if you’re a finance-savvy manager, you can even perform one yourself — at least the less detailed P&L statements.

Sidenote: Public companies are required by law to make their P&L statements publicly available — specifically, on their web page’s investor relations section.

Because of the insight they offer, profit and loss statements allow managers, leaders, and investors to make better investing decisions or spot underperforming business areas.

To get you on the same page with creating your P&L statements the right way, let’s take a quick look at 2 universal methods for creating profit and loss statements.

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2 Universal methods for creating a P&L statement

A profit and loss statement comes into existence thanks to 2 types of accounting methods — either the accrual method or the cash method. In simple terms, these universal accounting methods are tools for tracking and recording expenses in certain ways. 

Still, the method you choose can make all the difference.

For illustration, investors often inspect corresponding types of P&L statements published by same-sector companies of similar size. After crunching the numbers, they spot trends in managing expenses and decide to invest in one company rather than another. 

For clarity’s sake, suppose a company decides to use the cash method, although using the accrual method would have provided more insight into the company’s financial performance. In this case, the investors may disapprove of the inappropriate use of accounting methods, leading to the investor deciding not to invest in the company.

To explore further, we’ll next discuss the accrual and cash method in more detail.

Accounting method #1: Cash method

Accountants often call this “the cash accounting method.” Companies use the cash method only when they need to record instances of cash changing hands — that is, when cash actually enters or leaves the business. 

An example of this would be if a business counts their cash on hand and the money they paid for expenses.

Accountant Francis Fabrizi of Keirstone Limited explained that smaller companies typically prefer the cash method of accounting:

“Some small businesses may choose to use the cash method for accounting purposes, as the accrual method can be more complex and time-consuming to use.”

Yet, this approach comes with a major downside, as it accounts for cash only when it is either paid or received. 

Accounting method #2: Accrual method

Unlike the cash method, the accrual method records profit only when it’s earned. In a nutshell, this means that a company records expenses or revenue after the service has been provided, regardless of the fact that it hasn’t received the cash for offering the service.

Simply put, companies typically use the accrual method for funds that they expect to receive at a future date.

In the subscription age, the accrual method is a much-loved method for recording revenue and sales.

For example, picture an on-demand streaming service like HBO GO or Netflix. These companies use the accrual method to record revenue on their P&L statements, although they haven’t collected the payment for the service — but expect to receive it at a given subscription renewal period.

In fact, the accountant we mentioned previously, Francis Fabrizi, clarified that the accrual-based method is the preferred method for financial accounting:

“The reason is that the accrual method provides a more accurate picture of a company’s financial performance. This is because it recognizes revenue and expenses in the period in which they are actually incurred, rather than when cash is exchanged. The accrual method helps to ensure that revenues and expenses are matched in the same accounting period.”

As we have seen, the cash and accrual methods of accounting come with their pros and cons. So, choose the one that fits your needs, your company’s reporting, and your client’s requirements.

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Whichever accounting method you pick, bear in mind that the process of collecting data for your profit and loss statement is best done using accounting software. Take a look at some of the best on the market: 

• 15 best free accounting software tools  

What is the structure of a profit and loss statement? 

By now, you might wonder what is in a profit and loss statement . To answer your question, the structure of a typical P&L statement looks something like this:

• Revenue: the total amount of money that the business has earned during a given accounting period (a week, month, quarter, calendar year, or fiscal year).
• Cost of goods sold (COGS): the cost of the services or products sold by the company; includes items like materials and direct labor.
• Gross profit : the difference between revenue and cost of goods sold; also known as gross margin and gross income.
• Operating expenses: the cost of operating the company, including rent, utilities, payroll, general and administrative costs; includes anything not covered by the cost of goods sold.
• Operating income: the difference between gross profit and operating expenses; shows how much profit a business makes from its activities prior to deducting interest and taxes.
• Non-operating items: interest expenses, interest income, gains or losses from selling assets, and other non-operating expenses or non-operating income.
• Net income, net profit, or bottom line: the profit after the company has deducted all expenses; represents the company’s final figure or overall loss or profit for the corresponding period.

Sure, with all this information in mind, a P&L statement may not infuse you with enthusiasm, but it’s critical that you still prepare it regularly.

Anyway, don’t worry about it — we’ll provide you with a few examples and templates that’ll help you craft your own profit and loss statement. But before we get into that, let’s check out a few common types of P&L statements.

Explore the difference between gross salary and net salary in our blog post:

• Gross pay vs. net pay — Definition, calculation, key differences  

What are the common types of profit and loss statements?

For your convenience, here’s a list of a few types of P&L statements you can use, depending on whether you’re a small, medium, or large company.

Regardless of the period for which you choose to implement your P&L statement — weekly, monthly, quarterly, or yearly — make sure to pick the right format from the list above that fits your company preferences and needs.

Speaking of time periods, we’ll next explore 2 criteria that you must not lose sight of when creating your profit and loss statement.

2 Criteria to consider before crafting a P&L statement

At this point, you need to know some types of P&L statements can be extraordinarily simple, and others can be incredibly complex. Certainly, some of them fall somewhere in between, and we’ll get to those.

For now, we can classify types of profit and loss statements based on 2 criteria:

• Period the statement covers, and
• Depth of data the statement provides.

In essence, we can refer to them as periodic and detailed P&L statements, but the actual format varies based on a company’s preferences and reporting standards.

Let’s go over each of those 2 criteria of profit and loss statements in more detail.

Criterion #1: Period the statement covers

In terms of timeframes, P&L statements are categorized into 4 types:

• Weekly P&L statements allow you to get a sneak preview of your company’s financial health for the past week,
• Monthly P&L statements deliver insight into a company’s profitability or losses in the course of a calendar month,
• Quarterly P&L statements illustrate financial performance (or lack thereof) over a 3-month period, and
• Yearly P&L statements provide a snapshot of a company’s financial performance over the span of a fiscal year.

Make sure you choose one or more for optimal business results — because, in contrast, a lack of periodic P&L statements can stifle your business growth. 

For instance, even though people may be queueing up in front of your business to buy your product, that doesn’t necessarily mean that you’re making great profits. In fact, only after conducting a periodic P&L statement can you compare your profits with your costs.

Understandably, all P&L statements need to cover some period of time, whether a week, month, or year. So, let’s consider the depth of your profit and loss statement next.

Criterion #2: Depth of data the statement provides

You can divide the types of profit and loss statements in terms of the depth they go into to describe the financial status of a company. 

Rule of thumb — the more depth you go into, the better your chances of spotting inconsistencies and issues.

In short, a smaller company can easily analyze its bottom line with the single-step profit and loss statement. In contrast, a large multinational corporation may need to turn to a comparative profit and loss statement for maximum benefits.

For example, elaborate P&L statements can benefit companies looking to cut their general expenses, like amortization and depreciation costs, when they conduct a profit and loss statement.

Depreciation and amortization refer to the practice of estimating the value of company assets over time. Yet, some businesses neglect to factor in these items, leading to failure in projecting long-term growth.

With these important criteria out of the way, let’s explore 3 examples to make the process of creating profit and loss statements more tangible.

Examples of a profit and loss statement 

Now you’re familiar with the structure and types of P&L statements — kudos!

So, let’s dive into a few real-world scenarios where you can implement P&L reporting. For illustration, here are the 3 profit and loss statement examples we’ll cover:

• Small bakery P&L statement,
• Product/service company P&L statement, and
• Restaurant P&L statement.

Let’s up your financial game with a few real-life examples!

#1 Example of profit and loss statement: Small bakery

Suppose you want to start a business in Alabama , and you decide it’s going to be a small bakery. For a while, you successfully operate your company. After a few months, it’s high time you requested a profit and loss statement to be done to assess how well you’re doing.

In this case, you’ll use the single-step P&L statement because it neatly and simply analyzes the bottom line of a small business. For this example, it suffices to use the cash method of accounting, as this method records instances when cash actually enters or leaves the business. 

To start things off in the right direction, begin by looking at baked goods and beverages — that’s the entire company revenue at this stage. How much the bakery makes and sells, i.e., your revenue, impacts the financial bottom line.

Next, you need to consider costs, like utilities, wages, and ingredients. Finally, you’ll get the net income that depicts the loss or profit of the business for the given period.

For practical purposes, we’ll offer a simplified version of the single-step P&L statement for your small bakery. 

Note that the list of revenue items and costs listed below isn’t exhaustive, as you’ll probably have more things to add. Therefore, the overview below serves as an example.

#2 Example of profit and loss statement: Product/service company

A profit and loss statement isn’t confined to small businesses, like a bakery in Alabama. You can use it for complex organizations as well. 

For this example, it’s recommended that you use the accrual method of accounting. The reason is that this method records expenses or revenue after they’ve provided the service — although the company hasn’t received the cash yet. 

The accrual method is used for companies that need to get a more detailed overview of their financial performance. In other words — when the stakes are high.

To create a P&L statement for a software company, you first need to consider the revenue from subscriptions or product sales. After that, it’s appropriate to look into costs (COGS), like licensing, hosting, and customer support costs — all leading you to your gross profit. In short, you get the gross profit by deducting COGS from revenue.

Also, you need to consider the staff’s salaries, rent, and marketing expenses — all operating expenses. When you’re done with that, you need to evaluate the operating profit by deducting operating expenses from gross profit. The next step is to examine your taxes, interest on loans, and other necessary expenditures — your non-operating items. 

Finally, you get the net profit — that is, the final figures showing you how well your business is performing.

To make it even more concrete, here’s a simplified breakdown of a multi-step P&L statement you could use for a software company — let’s call them InvincibleDevs .

#3 Example of profit and loss statement: Restaurant

With millions of restaurants spread throughout the world, it might be interesting to explore how a P&L statement can impact their profitability. 

For illustration, we can take a single month’s worth of meals and pull it through a comparative P&L statement. In particular, let’s do a summary of the revenue and costs for January and February 2024. For this example, it’s best to use the cash method of accounting, as accountants typically record revenues and expenses only when the cash changes hands.

First, all the meals you typically sell during a month amount to your revenue. After you deduct the cost of goods sold — like ingredients — and labor costs from the revenue, you get a gross margin. Bear in mind that the cost of goods sold and labor costs are often jointly referred to as prime cost .

Second, you need to subtract the operating expenses, including wages of the entire kitchen and wait staff, plus the rent. These expenses are typically fixed.

Third, you have to cover the utilities, marketing expenses, and depreciation — all represented as general and administrative expenses (often also called non-operating expenses ).

In the end, our imaginary restaurant is left with the net income on that single month’s worth of meals for January and February 2024.

To make it more concrete, here’s what the restaurant budget for a single month’s worth of meals may look like in a comparative P&L statement:

Speaking of managing restaurants, here’s a list of the 10 of the best management software to operate any restaurant:

• ​​ 10 Best restaurant management software in 2022

3 Tested tips to make better P&L statements

As a business owner, it’s sometimes difficult to remember to do everything that needs to be done — from paying employees and contractors to recording and submitting all the required information to the authorities.

That’s why we’ve laid out 3 simple yet effective ways to make your profit and loss statements more akin to a walk in the park.

Tip #1: Track your time to better manage labor costs

You can’t possibly know everything that’s going on in your business if you don’t track what and when employees are doing. So, to improve your bottom line, you’ll have to keep tabs on the labor cost of people involved in your company. 

For example, a time-tracking system like Clockify lets you add billable rates for your clients — and define cost rates for your workforce. In Clockify reports, you get to compare your billable amounts (what you charge your clients) with your cost amounts (what you pay your employees).

As a result, you can better track profitability.

As soon as you enable cost rates in Workspace settings, you can apply billable rates and cost rates to any project, client, and employee. This allows you to create more detailed profit and loss statements because you’ll know exactly how much you charge your clients and pay your workforce.

So, the next time you want to make sure you’re meeting your financial goals, remember to start tracking your productivity and doing the same for your employees. Doing so will help you see where time is slipping through the cracks — and thereby ruining your business.

Tip #2: Keep tabs on expenses to protect your bottom line

A study that surveyed more than 200 Nordic organizations found that around 20% of receipts don’t make it into expense reports . That’s a sad reality for many companies nowadays. Yet, the cure to this problem is simple: Digitize your receipts!

For example, you can use an expense-tracking app like Clockify to track costs for project fixed fees by categories, like sum or unit. After inserting expenses, Clockify generates a fitting invoice that reflects all the expenses by category. 

To tie it up with your P&L statement, you can track how much your team is spending on operating expenses, like marketing or purchasing office supplies.

In fact, you can organize your expenses per many items, including:

• Team member, 
• Project, 
• Category, and more.

Whether you work as an accountant or just want to get a head start on tracking your expenses, check out our informative article on this topic:

• How to keep track of expenses

Tip #3: Manage your time better to increase productivity

This point bears repeating in any sector — create an impenetrable time management system. 

If your accountants and workforce are exhausted, they can make errors in their work, including what goes into your P&L statement.

But suppose you decide to make time management a priority. In this case, one of the intended consequences will be an improvement in your company’s bottom line. 

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So, here are a few practical tips for managing your time well when crafting a P&L statement:

• Type in the title of your task in your time-tracking app, 
• Click on the dollar sign to mark your time as billable,
• Start the timer to track your billable hours,
• Record expenses in your dedicated time billing software, and
• Create invoices for the services you provided.

As soon as you implement these techniques, you’ll be on your way to creating better financial statements and a work environment that drives stellar performance.

Get bite-sized advice on how to manage your time even better in our comprehensive guide:

• Everything you need to know about time management (+ tips)

Profit and loss statement templates

Now you have everything you need to grow your knowledge about P&L statements. But it’s prime time we get to a few useful templates you can use to craft your own profit and loss statement.

In this section, we’ll look into 3 templates of profit and loss statements:

• Single-step P&L statement template,
• Multi-step P&L statement template, and
• Comparative P&L statement template.

We hope you’re excited as we are — let’s dig in!

Profit and loss template #1: Single-step P&L statement

The single-step P&L statement is a simple financial tool that lets you get a bird’s-eye view of how much money your business is making or losing. Yet, its use doesn’t spread beyond small businesses — like our small bakery in Alabama. Larger companies typically avoid this when making long-term decisions.

The Single-step P&L statement template is useful if you’re just starting out and you’d like to calculate your total income without having to create a single-step P&L statement from scratch. 

This template is also practical for getting a snapshot of your expenses and cost of goods sold. In fact, it’s called single-step because it gives you a picture of the loss or profit in a single step. Yet, it doesn’t list things like operating and non-operating costs — things that still impact the bottom line.

Pros of the Single-step P&L statement template : 

• Makes record-keeping easy due to its simplicity, and
• Focuses on the company’s financial bottom line.

Cons of the Single-step P&L statement template : 

• Doesn’t distinguish between operating costs and non-operating costs, and
• Makes it hard to determine the sources of many activities, which discourages investors from investing in the business. 

How best to use the Single-step P&L statement template?

You have 2 formats to choose from for your template: a Google Sheets file and an Excel spreadsheet.

If you click on the Google Sheets link below, a new screen will appear with the prompt: Would you like to make a copy of the Single-step P&L statement template?

Click on Make a copy, and you’ll get an editable copy of the Single-step P&L statement template.

If you go with the Excel spreadsheet, clicking on the link will save the document to your device.

In any case, the document will be empty, with many zeroes. As soon as you begin inserting your digits, it will start to take shape. 

After you’ve inserted your company’s details and the period you want to cover, start by filling in the Revenue and gains column by adding details such as:

• Sales and interest revenues,
• Gains on sales of assets, and other revenues.

Next, you need to populate data in the Expenses and losses column, including:

• Cost of goods sold,
• Depreciation, 
• Office supplies,
• Rent, and other expenses.

To get the net income, you’ll need to subtract the Total of expenses and losses from the Total revenue and gains . 

⬇️ Download the Single-step P&L statement template (Google Sheets)

⬇️ Download the Single-step P&L statement template (Excel)

Profit and loss template #2: Multi-step P&L statement

The multi-step P&L statement is a more detailed type of profit and loss statement that includes multiple subtotals. For example, it separates the operating expenses and operating income from non-operating expenses and non-operating income. In turn, this helps a company find out which areas are performing as expected or poorly.

Suppose a budget item from your non-operating income — like insurance proceeds — is through the roof. In this case, the multi-step P&L statement provides you with details about this item. In contrast, the single-step P&L statement typically attaches this non-operating income to other budget items, which doesn’t give a proper explanation for the rise in insurance proceeds.

Filing out this template is time-consuming, but it helps you get more in-depth into your financial situation and is meant for mid-sized and large businesses.

Pros of the Multi-step P&L statement template: 

• Calculates gross profit and operating income easily, and
• Offers deeper insight into operating trends and financial performance.

Cons of the Multi-step P&L statement template: 

• Lacks simplicity, making it hard for non-finance persons to interpret, and 
• Takes plenty of time and effort to create one.

How best to use the Multi-step P&L statement template?

If you click on the Google Sheets link below, a new screen will appear with the prompt: Would you like to make a copy of the Multi-step P&L statement template?

Click on Make a copy, and you’ll get an editable copy of the Multi-step P&L statement template.

After you’ve inserted your company’s details and the period you want to cover, start by filling in details such as:

• Sales or revenue, and
• Cost of goods sold.

Next, you need to populate data in the Operating expenses column, including:

• Selling expenses, and 
• Administrative expenses.

This brings you to the Operating income , which you get when you subtract Total operating expenses from your Gross profit . The line item Operating income is critical, as it lets you see if your operating activities are generating profit or not. Depending on the industry, an operating activity can fall into many categories, like manufacturing, sales, marketing, and others.

Next, you need to fill in data for:

• Non-operating income, and
• Non-operating expenses.

To get the net income, you’ll need to add Operating income to the Total non-operating expenses . For simplicity’s sake, net income is the bottom line of a company. In other words, it represents the amount your business has made after deducting expenses, taxes, allowances, and other costs.

⬇️ Download the Multi-step P&L statement template (Google Sheets)

⬇️ Download the Multi-step P&L statement template (Excel)

Profit and loss template #3: Comparative P&L statement

The comparative P&L statement is a complex type of a profit and loss statement that compares different accounting periods for one company — or multiple different-sized companies. Experts praise it as one of the most useful P&L statements, as it presents investors and managers with changes in percentage and numbers from one period to the next. 

The Comparative P&L statement template presents figures of expenses and income on a single page without having to go back to previous P&L statements and compare them to current ones. 

This template allows you to spot problems and trends over different accounting periods. In fact, since it’s digital, you can easily correct numbers and do necessary calculations online without having to print them out.

Pros of the Comparative P&L statement template:

• Provides a clear comparison between multiple accounting periods, and
• Simplifies analysis of sales and net income line items.

Cons of the Comparative P&L statement template:

• Benefits the company only if it uses identical accounting principles consistently to produce such P&L statements (like the accrual or cash method), and
• Fails to be practical when the company branches out into new lines of business.

How best to use the Comparative P&L statement template?

If you click on the Google Sheets link below, a new screen will appear with the prompt: Would you like to make a copy of the Comparative P&L statement template?

Click on Make a copy, and you’ll get an editable copy of the Comparative P&L statement template.

After you’ve inserted your company’s details and the period you want to cover, start by filling in details for the Operating revenue column, such as:

• Net sales, and

Next, you need to populate data in the Operating expenses and General and administrative expenses columns, including:

• Salaries and wages,
• Depreciation,
• Payroll taxes,
• Insurance, and others.

This brings you to the Total operating expenses column, which you get when you add Total selling expenses to the Total general and administrative expenses .

• Income from operations,
• Interest expenses,
• Taxes, and others.

To get the net income, you’ll need to subtract Net income before tax from Taxes . 

⬇️ Download the Comparative P&L statement template (Google Sheets)

⬇️ Download the Comparative P&L statement template (Excel)

Note: Even though our P&L statement templates are pretty straightforward, it’s always best to consult with an accountant before making a profit and loss statement official. Clockify is not responsible for any losses or risks incurred should this example be used without further guidance from professionals.

FAQ about profit and loss statements

In this segment, we’ll take a look at a few frequently asked questions people face when they start working on a profit and loss statement.

What is the difference between a cash flow statement, balance sheet, and P&L? 

Companies typically make 3 types of financial statements on their financial performance annually, quarterly, and monthly, including:

• Cash flow statement — a financial document that lists the sources of cash deriving from investment, operating, and financing activities,
• Balance sheet — a financial statement that looks into equity, liabilities, and assets that the company has in its possession, and
• Profit and loss statement or income statement — a financial document that details revenues, sales, expenses, and costs in one form or another, depending on the company’s reporting standards.

But when it comes to disclosing this information, not all companies have the same responsibilities toward authorities.

Which companies have to give away financial statements?

Public companies are required by law to file regular reports with the U.S. Securities and Exchange Commission. Yet, most private companies don’t have to disclose this information — at least the ones with less than $10,000,000 in assets and with more than 500 owners who hold securities (a financial instrument that provides individuals with a form of company ownership).

Private companies that aren’t subject to these criteria often still provide these financial statements to the authorities. The reason? Well, this information gives financial experts deeper insight into how they do business. As a result, investors can make informed decisions about investing, and buyers can decide whether they want to buy or sell a company.

Paired together, the cash flow statement, balance sheet , and profit and loss statement comprise 3 critical components that help managers and investors explore a company’s financial performance over a given accounting period.

Is a P&L the same as an income statement?

Yes, profit and loss statement and income statement are synonyms for the financial document that gives you insight into your company’s financial performance. They include expenses, revenue, and net profit for a given accounting period (a week, month, quarter, or year).

Is P&L the same as a balance sheet?

A profit and loss statement differs from a balance sheet by focusing on expenses and revenue. On the other hand, the balance sheet looks into:

• Liabilities, 
• Assets, and 
• Equity. 

Yet, the balance sheet is a critical companion of the P&L statement in assessing the overall health of a business.

Does P&L include revenue?

Yes, a profit and loss statement always includes revenue and expenses. Line items on revenue, sales, expenses, and costs are the identifying marks of P&L statements.

Is a P&L a cash flow statement?

No, a profit and loss statement isn’t the same as a cash flow statement. Unlike the P&L statement, the cash flow statement lists the cash sources stemming from investment activities, operating activities, and financing activities. In other words, the cash flow statement doesn’t include information on expenses and revenue — as is the case with the P&L statement.

Wrap-up: Prepare regular P&L statements to learn if your business operations are profitable

To make your profits shine, you surely have to go through a strenuous process. And it’s so much more than mere cost management!  

In fact, you need to be aware of what exactly happens with your company’s money — and this is where a profit and loss statement comes into play.

In a nutshell, P&L statements allow accountants and managers to make more informed decisions by giving them insight into which activities are a waste of money and which generate profit.

For this and a wealth of other reasons, we geared you up with everything that can help you make the best profit and loss statements, paired with examples and templates. 

In summary, here are the main takeaways:

• Choose a simple or complex type of a P&L statement, depending on your needs,
• Harness the power of expense-tracking software to make the process effortless,
• Use templates to speed up the creation of a P&L statement,
• Implement a P&L statement regularly to keep tabs on sales and revenues, and
• Track and manage your time by using time and billing software.

If you follow just a few of these pieces of advice, you’ll be on your way to creating profit and loss statements that will amaze investors and managers alike.

Sources for the table:

• Khatabook, Comparative Income Statement: Examples, Analysis and Format
• Library of Congress, Research Guide on U.S. Private Companies
• Millie Atkinson, 2017, Income Statements Essentials
• Risks and benefits of handling digital receipts, Eurocard, 2021  
• Sandy Baruffi, 2021, The Basics Of Understanding Financial Statements: A Guide To Understanding Financial Reports  
• U.S. Securities and Exchange Commission, The Laws that Govern the Securities Industry
• U.S. Securities and Exchange Commission, What does it mean to be a public company?
• WallStreetMojo, Single-step Income Statement

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Profit and Loss Statement

Guide & templates.

Looking to understand the financial performance of your business? Review our guide to Profit & Loss statements and get a head start in preparing one with our free downloadable profit and loss statement templates.

What is a Profit and Loss Statement?

A profit and loss statement, or P&L statement, is a financial document that helps you understand your business’s profitability over time. By contrasting your business income with your expenses, profit and loss statements help track your overall profits and identify periods of loss.

A P&L statement includes three primary sections: business expenses (money going out), revenue (money coming in), and net income (the difference between the two, commonly referred to as your profit margin).

Small businesses often use profit and loss statements to demonstrate their profitability to potential investors or when applying for a bank loan. P&L statements are one of the essential financial statements for businesses, along with balance sheets and cash flow statements . They are necessary for proving the status your business finances, and an important tool for you to assess whether your business is in the black (profitable) or the red (operating at a loss).

Profit and Loss Statement examples and templates

Creating a Profit and Loss statement for the first time can be overwhelming, but you can use this example to understand how a P&L statement should look.

Get a better idea about how to evaluate your business’s profitability with this P&L statement example.

Analyzing the financial performance of your business doesn’t have to be overly complicated. This simple profit and loss statement template offers a straightforward structure, including a reporting date range, a list of common line items, and built-in formulas to sum up revenue and expenses.

Just plug in your numbers for the defined reporting period and get an instant assessment of the financial health of your business.

When your business achieves a level of growth that necessitates a more in-depth profit and loss report, a multi-step P&L statement is likely more appropriate. This statement type separates operating revenue and expenses from non-operating revenue and expenses, providing an understanding of how the core activities of a business impact revenue and expenses, versus its non-essential activities.

A multi-step P&L statement enables you to calculate gross profit and operating income, which can be especially useful for external investors evaluating a business.

Lili prepares P&L statements for you

Lili’s Accounting Software automatically generates financial reports based on your transaction categorization, including Profit & Loss statements.

How to create a Profit and Loss Statement

Set your time range.

Determine the period of time for which you need to create a profit and loss statement. This can be anything from a month to a financial quarter or even a year.

Input profits and losses

Identify all revenue and expenses for the selected period of time, and input this information into your P&L statement template.

Customize for your business

All of our free profit and loss statement templates are customizable to your needs! Edit or remove line items that are not relevant to your business, or add in lines as you go to fit with unique revenue sources and business expenses.

Check Excel formulas

Don’t assume the formulas are acting as they should! Double check formulas for fields such as Total Expenses and Net Profit, making sure the calculations are filling correctly.

Save your results

Save a copy of this P&L statement for your business records, or convert it to a PDF and share with the appropriate parties (e.g. an investor or lender).

What is the purpose of a P&L Statement?

A profit and loss statement is helpful for your own understanding of your business’s financial health. It is a quick way to check whether your business is operating at a profit or a loss, helps you review expenses to understand where you can increase spend (or where you need to cut costs), and helps you check in on the quality of your profit margin.

P&L statements are also a helpful way to outline your business’s current and projected profitability to any outside entities that may require it. Investors will want to see that you are operating at a profit, or have a pathway to future profitability. Lenders will need to see where your business is at financially right now, and how you plan to improve in the future. Business finances naturally will ebb and flow, and a profit and loss statement can demonstrate how these changes pan out over time.

Profit & Loss Statement Format

A profit and loss statement includes a number of elements that are relevant to your business finances, including:

Net sales/Revenue

Your total business revenue for the given period of time. This may look different depending on your accounting processes and the type of business you are running.

Cost of Goods Sold (COGS)

Expenses associated with producing the products or services you provide, such as raw materials, employee wages, and shipping expenses.

Business Expenses

Operating expenses related to selling and marketing, and administrative expenses associated with your business that are not directly related to the production of goods or services. Examples of such expenses include rent, advertising, and software subscriptions.

Your pre-tax income.

Earnings per Share (EPS)

Net income divided by the number of shares for the given period of time.

Depreciation

Value lost by depreciating assets such as equipment, inventory, vehicles, and property during the specified period of time.

Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA)

Earnings for the selected period of time after subtracting all internal costs, but before subtracting external costs (interest, tax, depreciation, and amortization).

Frequently asked questions

Yes, you can create your own profit and loss statement! A P&L statement can be manually prepared either by starting from scratch, or by using a statement template, like the downloadable statements templates available above .

Yes, an income statement is the same as a Profit and Loss statement. “Profit and Loss statement” and “income statement” are often used interchangeably , as they are both financial statements whose purpose is to summarize the financial performance of a business during a specific financial period in order to determine its profitability.

To read and understand your profit and loss statement, you should be intimately familiar with the primary metrics of your business, including revenue and expenses. However, in order to understand a P&L statement, you need to think strategically in order to put the numbers into the proper context.

Consider how a potential investor or lender would view your profits and losses, and use the following questions as guiding points to help you evaluate the financial state of your business: 

• Are your revenue streams aligned with your business goals?
• Are your expenses essential to your business?
• How is your profit margin compared to other businesses in your industry?
• If this isn’t your first P&L statement for your business, how does it compare to previous statements?

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How To Write a Profit & Loss Statement for Small Businesses

Learn what you need to know about making a profit and loss statement for your business -- and why you'll benefit from creating one.

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mall businesses rely on many tools and financial documents to track their health and growth. One of the most beneficial documents is the profit and loss statement, which highlights areas of strong performance and helps you plan for the future.

Here's what you need to know about making a profit and loss statement for your business and why you'll benefit from creating one.

What is a profit and loss statement?

A profit and loss (P&L) statement is a financial document that summarizes your business's revenue, costs, and gross and net income over time. Other terms for a P&L statement include:

• Income statement
• Earnings statement
• Revenue statement
• Operating statement/statement of operations
• Statement of financial performance

A P&L statement helps you track your business's financial health. By comparing statements from different periods, you can see changes in the company's performance over time.

Why profit and loss statements are important

Profit and loss statements are essential tools for small business owners and solopreneurs because:

• They're a health checkup for your business: They show you what you're doing right and what you might need to adjust.
• They make tax time easier: When you have updated P&L statements on file, you have information for your business taxes on hand.
• They help you make informed decisions: Your P&L data tells you whether your growth plans are working or if there’s room for adjustment.

Understanding the components of a profit and loss statement

P&L statements help you stay on track because they're all-encompassing. Here's what they cover.

Revenue is your total income from sales. If your business uses the accrual accounting method, you track revenue as the sale happens, regardless of whether payment went through during that period. If you use the cash method, you track it when the income reaches your checking account.

Cost of goods sold

Cost of goods sold (COGS) is the direct cost you incur to create your product or deliver your services. For example, if you own a web design company and hire a freelance writer to create content, that freelancer's pay is part of your COGS.

Your COGS naturally increases when you sell more products or services. Keep in mind that your COGS excludes operational costs and indirect expenses.

Gross profit

Gross profit is your revenue minus your COGS. If you sell $100,000 worth of product and it costs $50,000 to manufacture that product, your gross profit is $50,000.

Operating expenses

Operating expenses are the costs of your operational activities. They include all expenses related to core business opportunities and exclude legal and financial management costs .

For example, your facility rent and Google Ads are operating expenses. Your credit card interest is not.

Net profit is the amount of your income remaining after you deduct all of your expenses.

How to create a profit and loss statement

Your profit and loss statement will include the details from each of the above categories. Here's how to put it together.

1. Gather necessary financial information

A profit and loss statement for a small business will require all of your sales and expense data. If you have accounts payable and receivable systems in place, start there. You can also pull information from your bank statements, credit cards, and invoicing paperwork .

2. Choose a timeframe for the statement

According to the Corporate Finance Institute , most businesses do profit and loss statements monthly, quarterly or annually. Preparing statements more frequently will alert you more quickly to trends.

3. Begin with revenue

Revenue is the highest number on a healthy business's P&L sheet. Add up all of your sales for the period—regardless of whether all client payments went through during that time.

4. Deduct the cost of goods sold

If you sell products, the simplest way to calculate COGS is with the following formula:

Cost of Starting Inventory + Purchases - Cost of Ending Inventory = COGS

For example, suppose you own a resale business and you pay $10 for each item you sell. You have 10 items in storage at the beginning of the quarter and 7 at the end. You buy three in that period. Your COGS would be:

(10*10) + (3*10) - (7*10) = $100 + $30 - $70 = $60

You can use the same formula even if your COGS calculations are more complicated—for example, if you sell services or manufacture your products.

5. Calculate gross profit

Subtract your COGS from your revenue to calculate gross profit for the period. Bold this line item for easy reference.

6. Add operating expenses

Create line items for each of your operating expenses. These are all of the costs you incurred to keep your business running for this period. Common operating expenses include:

• Rent or mortgage
• Equipment maintenance
• Marketing services
• Payroll administration

If you spent money to run your business, but it didn't contribute to a specific sale, it's probably an operating expense.

7. Calculate net profit

Subtract operating expenses from gross profit to get net profit. Now that you've accounted for all of your expenses, this is profit you can use to build your business.

Tips for creating an accurate and effective profit and loss statement

Your profit and loss statement offers valuable information. It shows how quickly your business is growing and where your biggest costs are.

Keep detailed records

A profit and loss statement is only as useful as it is correct. A missing expense or sale can significantly change your key numbers, sometimes even altering your profitability status. Avoid costly errors by keeping records of all transactions.

Use accounting software

If professional accounting services aren't in your budget, accounting software can help you stay on track. It records and sorts your transactions, safely stores your financial data, and monitors your balances. Some tools even automate payouts and reimbursement.

Spend some time researching the best small business accounting software for your needs.

Consult with a financial expert

You don’t need a full-time hire to manage your finances. Before you create your first (or latest) P&L statement, consider making an appointment with a financial adviser or accountant.

An accountant will help you with the nuts and bolts of your statement, including finding errors and checking to see if anything's missing. An adviser will take a longer-term view and may offer recommendations on where adjustments can be made.

Regularly review and update the statement

P&L statements are most useful when generated regularly—monthly, quarterly, or annually. Get into the habit of creating consistent statements and enjoy knowing how your business is doing.

First steps to a profit and loss statement for your small business

Every profit and loss statement starts with data gathering. If your recordkeeping isn't what you want it to be, consider making a change, like signing up for business checking with Novo.

Novo makes it simple to keep track of money in and money out so you can focus on running your business. Check us out today .

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How to Prepare a Profit and Loss Statement

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Your goal as a business owner is to keep your business financially solvent, and to do that, you absolutely must know how much you're making and how much you're losing. A profit and loss (P&L) statement, otherwise called an income statement , breaks down your profit and loss line by line so you can determine your net income and make wise decisions about business opportunities. 

Since an income statement gives you a close look at your total profits, liabilities, and expenses, it's one of the most important financial documents in your roster. Because P&L statements are so important, even the most basic accounting software programs generate them for you at the click of a button. But if you want to draw up your own P&L statements (or if you want to understand exactly what goes into generating income statements), we have a short guide below. 

How to prepare an income statement in 7 steps

• Choose an income statement format
• Decide on a time period to calculate net income
• List your revenue
• Calculate your direct costs
• Calculate your gross profit
• Calculate your operating and non-operating expenses
• Determine your net income

If you're searching for accounting software that's user-friendly, full of smart features, and scales with your business, Quickbooks is a great option.

What is an income statement?

Before we start creating income statements, let's talk a bit more about why understanding profit and loss is essential to running a successful business.

Profit obviously refers to the amount of money your business is making—and yes, it's critical to know what your income is at any given moment. But revenue alone doesn't accurately represent your business's profits. After all, expenses like rent, employee paychecks, damaged inventory, bank fees, and a host of other expenses and liabilities come out of your bottom line.

To accurately understand your business's fiscal position, then, you need to calculate both profit  and loss to find your total net income. And that's exactly what the profit and loss sheet does for you: lists your total revenue,   total expenses, and total equity line by line to show how much cash your business is really bringing in.

P&L statements are also important for banks, lenders, and other investors. Lenders will almost always look at your income statement before deciding if your business is profitable enough to invest in. P&L sheets also demonstrate your own financial know-how—if you as a business owner don't have a good understanding of how to effectively manage profit and loss, lenders will be less likely to trust that your business can give them a good return on investment.

Again, you don’t have to prepare a P&L statement on your own. Plenty of accounting software will do it for you. And if you want more information on how to create an income statement specific to your business, we always recommend talking to your financial advisor. Virtual accountants and bookkeepers can help, as can business bankers, CPAs, or other trusted financial professionals.

1. Choose an income statement format

If you're creating an income statement by hand, using a spreadsheet program like Excel or Google Sheets will help you keep the process simple. Depending on the product you use, you can find an easy template instead of building a document from the ground up. For instance, Microsoft Office offers a series of Excel templates for P&L statements.

The U.S. Small Business Association also offers a simple income statement template you can easily download, print, and fill out.

Your accountant can also show you how they draw up a profit and loss statement. And, again, most accounting or bookkeeping software can automatically create a P&L statement for you or provide you with a template for you to fill in.

2. Decide on a time period to calculate net income

Most businesses calculate their profits and losses on a monthly, quarterly, or annual basis. If a lender or investor asks you for a P&L statement, they should specify the time period they need to see. Otherwise, just make sure to choose a time frame that shows you a general trend without overwhelming you with too much data; less than a month is probably too little time to reveal trends, while more than a year is probably too much.

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3. List your revenue

For most product-based small businesses, revenue equals sales, or the amount goods sold—such as the amount of hair products sold by your salon, the number of baked goods sold by your cafe, or the number of printouts sold by your copy shop. But depending on the business, revenue could also include things like rent money, tax returns, or licensing agreements.

List each revenue source as its own line on your profit and loss statement. Then, once you’ve listed each source, total the amount to find your gross revenue.

4. Calculate your direct costs

After adding up your revenue, it's time to add up your direct costs, or costs related directly to producing the products or services you sell.  If you sell a physical product, direct costs can also be called COGS, or cost of goods sold .

Not sure what expenses count as COGS? Let’s say you sell holiday-themed oven mitts on Etsy. To make your goods, you have to buy fabric, thread, a sewing machine, scissors, pins, patterns, and a host of other materials. The money you spend purchasing those items is your direct cost.

What if your business provides a service instead of goods? Since you don’t sell a physical product, you don’t have COGS, but you do still have direct costs. For instance, if you’re a psychologist, your office space is essential to the service you provide: without an office, you can’t offer services. So in this case, the money you pay for the office would be one of your primary direct costs.

Direct costs can also include the costs of the labor that goes directly into your product or service. Let’s imagine you’re the owner of a small lawn mowing company. Purchasing a lawn mower isn’t your only direct cost—the amount of money you pay an employee to push the lawn mower is also a direct cost.

Here's the basic formula for calculating your cost of goods sold:

Cost of goods sold = beginning inventory + purchases – ending inventory

For a more detailed breakdown of the COGS formula, check out our page on calculating COGS .

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5. calculate your gross profit.

So now you know what your direct costs are. But do they outweigh what you charge customers for your products or services? Let’s find out: subtract your direct costs from your total revenue to get your gross profit . Hopefully, you’re left with a positive number that shows how much your business is making.

Once you've calculated your gross profit, you can also calculate your gross margin, which represents your gross profit as a percentage. Just subtract your direct costs from your gross revenue, and then divide that number by the gross revenue. Then simply multiply that number by 100.

Hint: a higher gross margin indicates higher efficiency, which is excellent for any small business.

Here's a simplified equation for calculating gross profit:

Gross profit = Gross revenue – direct costs

And if you want to turn that number into a percentage, here's how to calculate your gross margin: 

Gross margin = { [Gross revenue – direct costs] / gross revenue } x 100

6. Calculate your operating and non-operating expenses

Operating expenses (OPEX) are any expenses necessary to your business that aren’t direct costs. In other words, these expenses refer to any money that doesn’t go directly into creating goods or supplying services, which is why you'll also see operating expenses referred to as  indirect expenses.

Depending on the type of business you run, these could include monthly utilities, business internet and phone plans, hardware and equipment, marketing costs, office supplies, building maintenance, and equipment repairs and maintenance. 

Basically, anything that impacts your day-to-day business operations should be listed as an operating expense on your income statement.

Since there are so many types of operating expenses, most income statements break down your OPEX by category. Here are a few of the most common.

Administrative expenses

Administrative expenses, also called general expenses, are any expenses you incur in the general administration of your business. You can also think of administrative expenses as costs you'd pay even if you weren't producing goods or selling services—for instance, even on a day you don't sell a single product, you're still paying for inventory storage space.

Overhead expenses

Overheads can refer to the fixed costs of running a business that don’t vary from month to month (in contrast with operating costs, which can fluctuate). If you pay the same monthly fee for your accounting software, that would count as a fixed cost , or overhead.

Depending on your business and type of income statement, overhead costs can also encompass all indirect labor and production costs. This contrasts with operating costs, which can mean the costs of actually running a business. Your accountant can help you understand more about what overheads look like at your unique business.

Additional operating costs

A few other main OPEX categories include payroll expenses, marketing costs, and sales costs. Once again, we recommend asking an accountant for personalized recommendations about how to break down your operating expenses on an income statement.

SG&A stands for selling, general, and administrative expense, and it's yet another term you might see used as a synonym for OPEX.  Basically, the term encompasses everything except for COGS, direct costs, research and development expenses, and interest on business loans.

Non-operating expenses

Non-operating expenses are (hopefully) one-time expenses like legal fees, tax penalties, or interest on a business loan. Once you've calculated your operating expenses, make sure to include your non-operating expenses on your P&L statement as well. 

7. Determine your net income

It’s time for the moment of truth: is your business profitable or not? Steel yourself, take a deep breath, and subtract your total expenses from your gross profit to get your net profit.

Is your net profit positive? Nice! You’re on track for financial health. Is it low, zero, or in the negatives? It’s time to reevaluate some business practices. That could mean cutting down your OPEX (operating expenses), downsizing departments, or switching raw materials manufacturers to reduce your COGS (cost of goods sold).

Other considerations: EBIT, EBT, and EBITDA

The steps above show you how to create a simple, straightforward income statement. You won’t need any more data than what we’ve listed here to fill out the U.S. Small Business Association’s template.

But maybe you’re doing in-depth business forecasting, or maybe your bank asked for more info before approving your loan. In that case, you want a longer, more detailed, and more accurate P&L statement, which means getting familiar with these abbreviations:

• Earnings before interest and taxes (EBIT): The total of your business’s net income without accounting for income taxes and loan interest.
• Earnings before tax (EBT): The total of your business’s net income plus the taxes you expect to pay (based on your business’s projected tax liabilities).
• Earnings before interest, taxes, depreciation, and amortization (EBITDA): The total of your business’s net income without accounting for income taxes, loan interest, or depreciation and amortization.

Depreciation refers to the constantly lowering value of your business’s physical assets, like a company car or office building. The more you drive the car, the more its value depreciates.

Amortization refers to the constantly lowering value of your business’s non-physical (or intangible) assets, like patents, copyrights, and trademarks.

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The takeaway

With the right financial documents on hand and sheer confidence in your Excel formula skills, creating a simple profit and loss statement is totally doable. Once you have the process down, feel free to pull data for a P&L statement whenever you need to—it’s the best, fastest, and cheapest way to quickly evaluate your small business’s financial health.

Want to learn more about how calculating profit and loss can help you grow your business? Check out our piece on how to effectively manage your company’s profit and loss .

Related reading

• The 6 Most Useful Financial Documents for Small Businesses
• The Best Tools for Creating a Financial Statement
• How to Calculate Net Operating Income (NOI)
• The Difference between Bookkeeping and Accounting

P&L statement FAQ

The answer largely depends on the size of your business, but P&L statement generation is one key aspect of most accounting job descriptions. Whether you have an in-house accountant, have a CPA on retainer, or pay a local accountant by the hour, the accountant you work with should be able to handily throw together an income statement in no time.

We always recommend meeting with an accountant or other financial advisor at least once when you first start creating financial documents for your business. From there, you can create your own P&L statements if you'd like to. Accounting software, including free accounting software , can draw up income statements for you with little effort on your part. 

There’s a lot of financial data for you to include in your P&L statement. Like, a lot . Finding a starting point can be intimidating, but it’s much less so if you already have a great bookkeeping system in place. If you do, you should have easy access to your company’s receipts, invoices, pay stubs, credit card payments, tax data, accrued interest, and more so you can sit down and start running the numbers.

If you don’t have a great bookkeeping system in place yet, cut yourself some slack—and then get right on creating one now. (Literally now. Right now. Step away from this page and get thee to a bookkeeper.)

If you do cash transactions, start keeping receipts and storing them in a logical, orderly way. Organize your general ledger. Hire a part-time bookkeeper for a small fee or invest in bookkeeping software that keeps all your data in the same place.

Getting organized—including entering all your information into new accounting software—can be a steep learning curve. But apart from creating excellent products and services and hiring fantastic employees, there’s next to nothing more important to your business than accurate, detailed financial records, profit and loss statements included.

Are there multiple types of income statements?

Yes. There’s the typical P&L statement detailed above, and there’s a pro forma P&L, which is an income statement you fill out when you first start a business. How do you figure out revenue for a business that only just started? Well, to put it frankly, you give it your best guess—that makes it a projected profit and loss sheet, not a record of current profit and loss.

If this is your first P&L (or pro forma P&L), make sure to lowball your revenue and highball your expenses. This is a great time to detail all of your expenses in full, from the electricity bill to the replacement staplers you just bought. Having a full list of expenses can help you moderate overheads and operating costs, which helps you build frugal business practices into your company right from the start.

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What Is an Example of a Profit and Loss (P&L) Statement?

J.B. Maverick is an active trader, commodity futures broker, and stock market analyst 17+ years of experience, in addition to 10+ years of experience as a finance writer and book editor.

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

A company's statement of income is often called its profit and loss statement (P&L) . It lists revenues, expenses, and net profit for the period covered. There are typically quarterly and annual P&Ls, but some companies might publish monthly P&Ls.

Public companies produce P&L statements to meet legal reporting requirements and inform investors. The P&L is carefully reviewed by market analysts, investors, and creditors to evaluate a company's revenues, expenses, and profitability.

Key Takeaways

• A P&L statement shows a company's revenues and expenses related to running the business, such as rent, cost of goods sold, freight, and payroll.
• Each entry on a P&L statement provides insight into how much money a company made and spent. 
• P&L statements help companies gauge how well they're operating and benchmark current performance relative to future projections.
• They provide financial information that can be compared to that of rivals in the same industry.
• Investors and lenders use P&L statements to inform their investing or lending decisions.

What Does a Profit and Loss (P&L) Statement Show?

The P&L contains details about a company's financial circumstances. The statement generally has the following sections:

• Revenues : The total amount of income from the sale of goods or services associated with the company's primary operations.
• Expenses : Costs deducted from revenue, such as the cost of goods sold (COGS) , wages, rent, marketing, administration costs, utilities, interest expenses, and depreciation .
• Gains : Any gains during the period, such as selling unused equipment.
• Losses : Any losses incurred in the period.
• Net Income : While not necessarily a section on its own, this line item shows what was earned after accounting for everything. It is also known as the bottom line .

Due to how comprehensive it can be, the P&L statement paints a clear picture of how much money a company makes and spends. It also highlights whether the company was profitable or suffered a loss.

To ensure a proper understanding of profitability, accountants use accrual accounting to prepare the P&L statement. Accrual accounting recognizes revenue and expenses when they occur rather than when money is received or paid.

Why Profit and Loss (P&L) Statements Are Public

P&L statements are made available to the public for a variety of reasons. First, public companies in the U.S. are required to file their financial statements with the Securities and Exchange Commission (SEC) . The inner financial workings of a company are of great interest to numerous people, including accountants, economists, and investors.

Even business owners need a comprehensive understanding of a company's financial events and results. The P&L and other financial statements can help them identify unnecessary expenditures, opportunities to increase revenue, and other ways to improve performance.

For all of these professionals, assessing a company's financial strength means taking a detailed look at  total revenue , expenditures, the amount of debt or leverage , additional investments, secondary operations, and tax burdens.

Financial statements, including the P&L, can help businesses understand current performance relative to projections and create realistic forecasts. They can also help business owners and investors compare a business's performance against competitors.

How Investors Use Profit and Loss (P&L) Statements

Investors and lenders use data from P&L statements to determine a company's profitability and  risk level . For example, companies must provide evidence of their financial standing and ability to make consistent payments to apply for loans.

If the P&L statement reflects that a company does not generate enough operating income to adequately cover current loan payments, banks are less likely to loan additional funds. Sometimes, a downturn in income could signal loan  default .

If you're an investor making important investment decisions, be sure to compare the P&L statements of companies that are similar in size and within the same industry or sector. This gives you an apples-to-apples comparison. Comparing the financial statements of a large pharmaceutical company with those of a small energy company doesn't make sense, as they have different factors that play into their revenues and expenses.

Profit and loss statements may commonly be referred to as any of the following:

• Statement of profit and loss
• Statement of operations
• Statement of financial results or income
• Earnings statement
• Expense statement
• Income statement

Example of a Profit and Loss (P&L) Statement

Some companies publish their P&L statements under that name. Others may use different terms to describe the same thing. Consider Pressure Bioscience, which calls its P&L a statement of operations.

The image below shows how the P&L statement or, in this case, the statement of operations is broken down:

This particular statement is broken into three sections:

• Costs and Expenses
• Other (Expense) Income

It then lists net losses and shareholder information at the bottom. The total value under the expense category is subtracted from the total value of the company's revenue, resulting in an operating profit if the result is positive or an operating loss if it's negative.

What Is the Difference Between the P&L Statement and a Cash Flow Statement?

A P&L or income statement shows readers the revenue and total expenses for a certain period. The cash flow statement, on the other hand, details a company's cash inflows and outflows during that period. This statement starts with the figure for net profit, which it gets from the P&L statement.

Does Every Company Have to Prepare a P&L Statement?

No. Only public companies are legally required to prepare the P&L and other financial statements and file them with the SEC annually and quarterly. Companies not required to prepare financial statements such as the P&L should consider doing so because they provide business owners with a systematic way to obtain a clear view of their company's financial circumstances.

Why Does the P&L Statement Matter?

It matters because it shows investors, analysts, and business owners whether a company is making or losing money. A careful review of the P&L also can stimulate ideas for cutting expenses and increasing revenue.

A P&L statement shows investors and other interested parties the amount of a company's profit or loss. Revenue and expenses are shown when they occur, not when the money actually moves into or out of the company's bank account. The P&L statement is often the most sought-after financial document because it shows whether a company is profitable.

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What Is a Profit and Loss Statement?

Table of Contents

At some point, you’ve probably heard the phrase, “It takes money to make money.” But if you’re not careful, it’s easy to let your expenses spiral out of control and reach a point where you’re making little to no profit.

That’s why all businesses need to track their revenue and expenses with a profit and loss (P&L) statement. A P&L statement will help you measure your company’s financial health and see how your business is doing.

Here’s a look at what a P&L statement is, what it includes and how you can use one to gain information about your business.

Editor’s note: Looking for the right accounting software for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

What is a P&L statement?

A P&L statement is a financial report that summarizes a company’s revenue, expenses and profits or losses over a fiscal year or quarter. When you read a P&L statement, you’ll see whether the company can generate sales, manage expenses and earn a profit.

The two main categories outlined in a P&L statement are income and expenses. Income includes things like product sales, interest earned, commissions or rental income. Expenses include the cost of goods sold (COGS), marketing and advertising fees and taxes.

Publicly traded companies are required to produce three financial reports every quarter: a P&L statement, balance sheet and cash flow statement .

Why do businesses need to track P&L?

If you aren’t a publicly traded company with shareholders to report to, you may wonder why it’s necessary to create a P&L statement. But this financial statement gives you the following essential information about your business.

Profitability of your business

A P&L statement will indicate whether your business is profitable by showing whether you’re losing money on the sale of your products or services. Tracking this information could help you come up with new ideas on how to increase sales.

Insight on how your business is performing

When you run a business, you want to look at more than your overall income. You also want to observe trends in your business and whether it’s growing over time. Tracking industry trends can help you determine the specific actions you should be taking in your business.

For instance, if your gross revenue has been down since the beginning of the year, you need to focus on increasing sales. If your gross revenue is satisfactory, but the net income is down, look for ways to cut expenses.

The overall health of your business

At some point, you may need to apply for a small business loan. As part of the requirements for getting approved , your lender will ask for financial documents like a P&L statement. This document gives lenders a look at your business’s overall health and shows them whether or not it’s earning a profit.

Even if you never apply for financing, it’s a good idea to generate a P&L statement at least once a year. The information you gather will help you make better business decisions. Fortunately, creating a P&L statement is easier than you might think.

What information do you need for a P&L?

A typical P&L statement will include four main sections: revenue, expenses, COGS and net income. Each section will make up a new line on the P&L statement.

A company’s revenue is its net sales during a given financial period. The revenue section will outline the revenue earned from its primary business activities. It will also show non-operating revenue and income earned from the sale of business assets . 

Your expenses are what you spend on the day-to-day operations of running your business. It includes things like business insurance, marketing costs and rent. These expenses are necessary to keep your business running but don’t directly help you produce more revenue.

This section shows how much it costs your company to produce its products or services. For instance, if a business sells physical products, this section might include labor or materials. The COGS will not include overhead costs like rent payments. 

Here is the formula you’ll use to calculate the COGS: 

Beginning Inventory + Purchases – Ending Inventory = COGS

You may notice that while the COGS is technically an expense, it’s not included in the expenses section. That’s because businesses separate the COGS for tax purposes. The IRS says that businesses can deduct the COGS from their taxable earnings, which reduces their overall tax obligations.

Your net income is included at the bottom of a P&L statement. It’s what’s left after you subtract your expenses from your revenue.

If your net income shows that you earned a profit, your business is making more than it spends. If the company is spending more than it brings in, you have a net loss for that financial period.

You can find many free online templates that will help you create a P&L statement.

What is included in a P&L statement?

Here is some of the information you should include in a P&L statement:

• Total revenue
• Total expenses
• Selling, general and administrative expenses
• Research and development expenses
• Marketing and advertising costs
• Interest paid
• Depreciation
• Earnings before interest, taxes, depreciation and amortization

A P&L statement includes a variety of information, but certain items won’t be listed. For instance, you won’t include your business’s assets, liabilities or equity.

When compiling your P&L statement, look out for expense fraud, such as people padding expenses or creating fictitious expenses.

Example of a P&L

Below is a copy of General Motors’ 2018-2020 P&L statement, which the company refers to as its Consolidated Income Statement. You’ll notice that GM posted a net income of $6.4 billion in 2020, according to The Detroit News , despite the pandemic. 

How accounting software can help manage your P&L statement

Creating a P&L statement isn’t difficult and you could do it on your own. However, the process is much easier if you use accounting software, which will help you stay on top of your small business accounting challenges and help you avoid common accounting mistakes . 

With the right accounting software, you’ll already be tracking your revenue and expenses regularly. That means you can generate a P&L statement easily at the end of the quarter or year.

If you’re trying to find the right accounting software, here are some of the best options.

QuickBooks is our pick for the best accounting software for small businesses. The company provides a wide range of payment tiers, so its software can support you at every stage of your business. QuickBooks is a good option for everyone, whether you’re a solopreneur or running an enterprise company.

QuickBooks provides many features, including the ability to generate financial reports like a P&L statement. It will sort your transactions for you automatically, and you can track your company’s cash flow from your dashboard.

You can check out our QuickBooks review for more information. 

FreshBooks is a cloud-based accounting and invoicing software you can access from any device. It’s a good option for freelancers or individuals who aren’t well-versed in accounting.

The software uses double-entry accounting, so you can easily create financial reports like a P&L statement and gain insight into your business’s financial health. You can also invite your accountant to collaborate with you on your FreshBooks account.  

Be sure to read our FreshBooks review for more information. 

We chose Xero as the best option for growing businesses because the software offers flexible features and a variety of pricing plans. It has all the features you need when you’re just getting started, as well as advanced features like payroll and inventory management.

You can use Xero to track your expenses and understand your real-time cash position. You can also use the software to create financial reports and prepare for tax season.

You can learn more by reading our full review of Xero .

Oracle NetSuite

Oracle NetSuite’s software is one of the best options for automating your business accounting. You’ll only pay for the features you use, so it’s a great option for small businesses that plan to scale in the future. 

You can use the software to reconcile transactions, manage accounts payables and receivables and create financial reports. Since the software is cloud-based, you can access your financial data from anywhere. 

Find out more by reading our online Oracle NetSuite review . 

Check out our reviews of all the best accounting and invoicing software to find the best one for your business.

P&L statements provide valuable insights into your business

A P&L statement provides an overview of how much your business is earning and whether you’re making or losing money. Companies of all sizes can benefit from creating and reviewing a P&L statement regularly.

If you’re new to P&L statements, you can create one using a template or you might want to consider investing in feature-rich accounting software .

Software like QuickBooks or Xero can help you track and manage your expenses and generate a P&L statement within seconds. That way, you can stay on top of your finances and be prepared come tax season.

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Key Financial Metrics for Your Business Plan

Posted september 6, 2018 by noah parsons.

Digging into your business’s financials can feel a bit like eating your fruits and vegetables, but what’s good for your business’s health is good for you.

When you’re putting a business plan together, the financial plan can feel like the most intimidating part. If you’re like most business owners, you probably didn’t go to business school or have a degree in accounting.

That’s O.K. This article will explain everything that you need to include in your financial plan so you get off to a good start.

All business plans, whether you’re just starting a business or building a plan for an existing business, should include the following:

Profit and loss statement, cash flow statement, balance sheet, sales forecast, personnel plan.

• and maybe some business ratios and/or a break-even analysis

Even if you’re in the very beginning stages of your business, these financial statements can still work for you.

The good news is that they don’t have to be difficult to create or hard to understand. With just a few educated guesses about how much you might sell and what your expenses will be, you’ll be well on your way to creating a complete financial plan.

A profit and loss statement is essentially an explanation of how your business made a profit (or incurred a loss) over a certain period of time. It’s a table that lists all of your revenue streams and all of your expenses—typically for a three-month period—and lists at the very bottom the total amount of net profit or loss.

This is a financial statement that goes by a few different names—profit and loss statement, income statement, pro forma income statement, P&L (short for “profit and loss”)—but no matter what you call it, it’s an essential report and very important to understand.

There are different formats for profit and loss statements, depending on the type of business you’re in and the structure of your business (nonprofit, LLC, C-Corp, etc.).

A typical profit and loss statement should include:

• Your revenue (also called sales)
• Your “cost of sale” or “cost of goods sold” (COGS)—keep in mind, some types of companies, such as a services firm, may not have COGS
• Your gross margin , which is your revenue less your COGS

These three components (revenue, COGS, and gross margin) are the backbone of your business model —i.e., how you make money.

You’ll also list your operating expenses, which are the expenses associated with running your business that aren’t incurred directly by making a sale. They’re the fixed expenses that don’t fluctuate depending on the strength or weakness of your revenue in a given month—think rent, utilities, and insurance.

Your gross margin less your operating expenses will give you your operating income:

Gross Margin – Operating Expenses = Operating Income

Depending on how you classify some of your expenses, your operating income will typically be equivalent to your “earnings before interest, taxes, depreciation, and amortization” (EBITDA)—basically, how much money you made in profit before you take your accounting and tax obligations into consideration. This is also called your “profit before interest and taxes,” gross profit, and “contribution to overhead”—many names, but they all refer to the same number.

Your so-called “bottom line”—officially, your net income, which is found at the very end (or, bottom line) of your profit and loss statement—is your EBITDA less the “ITDA.” Just subtract your expenses for interest, taxes, depreciation, and amortization from your EBITDA, and you have your net income:

Operating Income – Interest, Taxes, Depreciation, and Amortization Expenses = Net Income

For further reading on profit and loss statements (a.k.a., income statements), including an example of what a profit and loss statement actually looks like, check out “ How to Read and Analyze an Income Statement.”  And if you want to start building your own, download our free Income Statement Example .

A cash flow statement (also called a “statement of cash flows”) is an explanation of how much cash your business brought in, how much cash it paid out, and what its ending cash balance was, typically per-month.

That might sound like sales, expenses, and profits, but it’s not.

Consider this: What happens when you send out an invoice to a client, but they don’t pay it by the due date ? What happens when you pay your own bills late, or early? These kinds of things aren’t reflected in your profit and loss statement, but they are explained in your cash flow statement.

Your cash flow statement is just as important as your profit and loss statement. Businesses run on cash—there are no two ways around it.

Without a thorough understanding of how much cash you have, where your cash is coming from, where it’s going, and on what schedule, you’re going to have a hard time running a healthy business. And without the cash flow statement, which lays that information out neatly for lenders and investors, you’re not going to be able to raise funds. No business plan is complete without a cash flow plan.

The cash flow statement helps you understand the difference between what your profit and loss statement reports as income—your profit—and what your actual cash position is.

It is possible to be extremely profitable and still not have enough cash to pay your expenses and keep your business afloat, and it is also possible to be unprofitable but still have enough cash on hand to keep the doors open for several months and buy yourself time to turn things around—that’s why this financial statement is so important to understand.

How cash versus accrual accounting affects the cash flow statement

There are two methods of accounting—the cash method and the accrual method.

The cash method means that you just account for your sales and expenses as they happen, without worrying about matching up the expenses that are related to a particular sale or vice versa.

The accrual method means that you account for your sales and expenses at the same time—if you got a big preorder for a new product, for example, you’d wait to account for all of your preorder sales revenue until you’d actually started manufacturing and delivering the product. Matching revenue with the related expenses is what’s referred to as “the matching principle,” and is the basis of accrual accounting.

If you use the cash method of accounting in your business, your cash flow statement isn’t going to be very different from what you see in your profit and loss statement. That might seem like it makes things simpler, but I actually advise against it. I think that the accrual method of accounting gives you the best sense of how your business operates, and that you should consider switching to it if you aren’t using it already.

For the best sense of how your business operates, you should consider switching to accrual accounting if you aren’t using it already.

Here’s why: Let’s say you operate a summer camp business. You might receive payment from a camper in March, several months before camp actually starts in July—using the accrual method, you wouldn’t recognize the revenue until you’ve performed the service, so both the revenue and the expenses for the camp would be accounted for in the month of July.

With the cash method, you would have recognized the revenue back in March, but all of the expenses in July, which would have made it look like you were profitable in all of the months leading up to the camp, but unprofitable during the month that camp actually took place.

Cash accounting can get a little unwieldy when it comes time to evaluate how profitable an event or product was, and can make it harder to really understand the ins and outs of your business operations. For the best look at how your business works, accrual accounting is the way to go.

Your balance sheet is a snapshot of your business’s financial position—at a particular moment in time, how are you doing? How much cash do you have in the bank, how much do your customers owe you, and how much do you owe your vendors?

The balance sheet is standardized, and consists of three types of accounts:

• Assets (accounts receivable, money in the bank, inventory, etc.)
• Liabilities (accounts payable, credit card balances, loan repayments, etc.)
• Equity (for most small businesses, this is just the owner’s equity, but it could include investors’ shares, retained earnings, stock proceeds, etc.)

It’s called a balance sheet because it’s an equation that needs to balance out:

Assets = Liabilities + Equity

The total of your liabilities plus your total equity always equals the total of your assets.

At the end of the accounting year, your total profit or loss adds to or subtracts from your retained earnings (a component of your equity). That makes your retained earnings your business’s cumulative profit and loss since the business’s inception.

However, if you are a sole proprietor or other pass-through tax entity, “retained earnings” doesn’t really apply to you—your retained earnings will always equal zero, as all profits and losses are passed through to the owners and not rolled over or retained like they are in a corporation.

If you’d like more help creating your balance sheet, check out our free downloadable Balance Sheet Template .

The sales forecast is exactly what it sounds like: your projections, or forecast, of what you think you will sell in a given period (typically, a year to three years). Your sales forecast is an incredibly important part of your business plan, especially when lenders or investors are involved, and should be an ongoing part of your business planning process.

Your sales forecast should be an ongoing part of your business planning process.

You should create a forecast that is consistent with the sales number you use in your profit and loss statement. In fact, in our business planning software , LivePlan, the sales forecast auto-fills the profit and loss statement.

There isn’t a one-size-fits-all kind of sales forecast—every business will have different needs. How you segment and organize your forecast depends on what kind of business you have and how thoroughly you want to track your sales.

Some helpful questions to ask yourself are:

• How many customers do you anticipate?
• How much will you charge them?
• How often will you charge them?

Your sales forecast can be as detailed as you want it to be, or you can simplify your forecast by summarizing it. However you choose to do a sales forecast, you should definitely have one.

Generally, you’ll want to break down your sales forecast into segments that are helpful to you for planning and marketing purposes. If you own a restaurant, for example, you’d probably want to separate your forecasts for dinner and lunch sales; if you own a gym, it might be helpful to differentiate between single memberships, family memberships, club shop sales, and extra services like personal training sessions. If you want to get really specific, you might even break your forecast down by product, with a separate line for every product you sell.

Along with each segment of forecasted sales, you’ll want to include that segment’s “cost of goods sold” (COGS). The difference between your forecasted revenue and your forecasted COGS is your forecasted gross margin .

The importance of the personnel plan depends largely on the type of business you have. If you are a sole proprietor with no employees, this might not be that important and could be summarized in a sentence of two. But if you are a larger business with high labor costs, you should spend the time necessary to figure out how your personnel affects your business.

Think of the personnel plan as a justification of each team member’s necessity to the business.

If you create a personnel plan, it should include a description of each member of your management team, explaining what they bring to the table in terms of training, expertise, and product or market knowledge. If you’re writing a business plan to present to lenders or investors, you could think of this as a justification of each team member’s necessity to the business, and a justification of their salary (and/or equity share, if applicable). This would fall in the company overview section of your business plan.

You can also choose to use this section to list entire departments if that is a better fit for your business and the intentions you have for your business plan . There’s no rule that says you have to list only individual members of the management team.

This is also where you would list team members or departments that you’ve budgeted for but haven’t hired yet. Describe who your ideal candidate(s) is/are, and justify your budgeted salary range(s).

Additional calculations you might find useful:

Business ratios.

If you have your profit and loss statement, your cash flow statement, and your balance sheet, you have all the numbers you need to calculate the standard business ratios . These ratios aren’t necessary to include in a business plan—especially for an internal plan—but knowing some key ratios is almost always a good idea.

You’d probably want some profitability ratios, like:

• Gross margin
• Return on sales
• Return on assets
• Return on investment

And you’d probably want some liquidity ratios, such as:

• Debt-to-equity
• Current ratio
• Working capital

Of these, the most common ratios used by business owners and requested by bankers are probably gross margin, return on investment (ROI), and debt-to-equity.

Break-even analysis

Your break-even analysis is a calculation of how much you will need to sell in order to “break-even” (i.e., how much you will need to sell in order to pay for all of your expenses).

Consider a restaurant: It has to be open, with the tables set and the menus printed and with the bartender and all of the cooks and servers working, in order to make even one sale. But if it only sold one dinner, the restaurant would be operating at a loss—even a $50 meal isn’t going to cover the night’s utility bills. So the restaurant owner might use a break-even analysis to get an idea of how many meals the restaurant needs to sell on a given night in order to cover its expenses.

In determining your break-even point, you’ll need to figure out the contribution margin of what you’re selling. In the case of a restaurant, the contribution margin will be the price of the meal less any associated costs. For example, the customer pays $50 for the meal. The food costs are $10 and the wages paid to prepare and serve the meal are $15. Your contribution margin is $25 ($50 – $10 – $15 = $25).

Using this model you can determine how high your sales revenue needs to be in order for you to break even. If your monthly fixed costs are $5,000 and you average a 50 percent contribution margin (like in our example with the restaurant), you’ll need to have sales of $10,000 in order to break even.

Your financial plan might feel overwhelming when you get started, but the truth is that this section of your business plan is absolutely essential to understand.

Even if you end up outsourcing your bookkeeping and regular financial analysis to an accounting firm, you—the business owner—should be able to read and understand these documents and make decisions based on what you learn from them. Using a business dashboard tool can help, so you’re not wading through spreadsheets to put your figures on the important details.

If you create and present financial statements that all work together to tell the story of your business, and if you can answer questions about where your numbers are coming from, your chances of securing funding from investors or lenders are much higher.

Further resources:

For more business financial concepts made simple, check out these articles on cash burn rate ,  direct costs ,  net profit ,  accounts payable ,  accounts receivable ,  cash flow ,  profit and loss statement ,  balance sheet , and  expense budgeting .

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Noah Parsons

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Profit and Loss (with LivePlan)

“Business is all about solving people’s problems – at a profit.”

― Paul Marsden

The Standard Profit and Loss (Income Statement)

• It starts with Sales, which is why business people who like buzzwords will sometimes refer to sales as “the top line.”
• It then shows Direct Costs (or COGS, or Unit Costs).
• Then Gross Margin, Sales less Direct Costs.
• Then operating expenses.
• Gross margin less operating expenses in gross profit, also called EBITDA for “earnings before interest, taxes, depreciation and amortization.” I use EBITDA instead of the more traditional EBIT (earnings before interest and taxes). I explained that choice and depreciation and amortization as well in Financial Projection Tips and Traps , in the previous section.
• Then it shows depreciation, interest expenses, and then taxes…
• Then, at the very bottom, Net Profit; this is why so many people refer to net profit as “the bottom line,” which has also come to mean the conclusion, or main point, in a discussion.

The following illustration shows a simple Projected Profit and Loss that LivePlan does for the bicycle store I’ve been using as an example. At this point you’ve already done all the inputs for the formal projection. LivePlan gathers the information it already has, and puts it into a formal projection matching normal standards.

This example doesn’t divide operating expenses into categories. The format and math start with sales at the top. You’ll find that same basic layout in everything from small business accounting statements to the financial disclosures of large enterprises whose stock is traded on public markets. Companies vary widely on how much detail they include. And projections are always different from statements, because of Planning not accounting . But still this is standard.

LivePlan also puts the formal Projected Profit and Loss as an annual summary into your plan, as shown in the illustration below; and a monthly version into the appendices.

LivePlan will also automatically draw charts to insert in a plan along with the Projected Profit and Loss. The following illustration shows a LivePlan chart of Projected Net Profits.

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