What makes a P&L helpful?
A P&L statement is not just a mandatory financial document but also a valuable tool for your business. It can provide a clear snapshot of your business' financial health, help you track your revenue and expenses, identify areas of profitability, and make strategic decisions.
Here are some key benefits of using a P&L statement for your business:
- It can show you the financial health of your business The great thing about making these statements on a regular basis is that they provide a detailed map of your business’ financial health. Each statement covers a specific amount of time, which allows you to map out how your business has been doing over time to help you have valuable information on how your business is doing and let you know if there’s anything you need to change or reverse.
- It can help teach you about fundamental financial concepts P&L statements are a valuable teaching tool that you can use to help your business better understand different financial concepts. This is especially helpful for new entrepreneurs who may be caught up in the joys of high revenue numbers.
- It’s helpful for investors If you’re searching for investors for your business, your P&L statements can be an immensely powerful tool. These statements can be used by investors to be more informed about your business and help influence their decision on whether they want to invest in your business or not.
How do you put a P&L statement together?
There are two ways you can create a P&L statement for your business.
- Accrual Accounting Accrual accounting forms record revenue, expenses, and income even before money enters or leaves the business. These records are recorded as the revenue and expenses are incurred. For example, if you receive bills for things like electricity, water, or building rent, they are recorded when you receive them, even if you pay them later.
- Cash-Basis Accounting Cash basis accounting records revenue when it is received and expenses as they are paid. An example would be if you send an invoice to a customer, you would record that revenue only when the customer sends the money to your business, even if it is some time after you sent the invoice.
Both accounting methods have pros and cons, but cash-basis accounting tends to be the more popular option for small businesses that make less than $25 million in annual sales because it is the more straightforward option of the two. If your business is inventory-based, though, it is sometimes recommended to use accrual accounting, and it is the required method for businesses that make $25 million in sales over three years or are publicly traded.
For more information on these two forms of accounting, check out this Forbes article called “Cash vs Accrual Accounting: What’s The Difference?”
Your P&L statement is an incredibly useful tool for your business. Learning how to put together these statements and how to use them for the benefit of your business can help give you a better understanding of what changes need to be made or what needs to stay the same through the mapping you can do with your statements over time. Every business’ P&L statement will look different and require different sections depending on what your specific business offers and uses for daily operations.
If your business is using bookkeeping software or a CPA or accountant, you should be able to access or request P&L statements. Here are a few templates for P&Ls.
- Score
- Gusto
- Freshbooks
- Microsoft
- Monday.com
- Hubspot
Whether you're a new business owner just starting out and learning the ends and outs of running your business, profitable growth is imperative. We can help you work through the strategy and tactics to meet your goals. And, improve your P&L. Contact us to schedule a consultation!
We are not a CPA or accountant - this information is provided for educational purposes.
