As a small business owner, it’s essential to understand your financial statements to make informed decisions about your business’s future. One of the most critical financial statements is the profit and loss (P&L) statement, which provides an overview of your business’s revenue, expenses, and net income over a specific period. In this article, we’ll cover how to complete a profit and loss statement for your small business.
Income Statement vs. Balance Sheet
Before diving into the details of a P&L statement, it’s essential to understand the difference between an income statement and a balance sheet. Both are essential financial statements that provide valuable insights into your business’s financial health, but they serve different purposes.
An income statement (also called a profit and loss statement or P&L) shows your business’s revenue and expenses over a specific period, typically a month, quarter, or year. It provides a snapshot of your business’s profitability and is used to track your business’s financial performance over time.
On the other hand, a balance sheet provides a snapshot of your business’s financial position at a particular point in time. It lists your business’s assets, liabilities, and equity, giving you a clear picture of your business’s financial health. A balance sheet is essential for understanding your business’s overall financial situation and is often used to secure loans or investment.
Completing a Profit and Loss Statement
To complete a profit and loss statement for your small business, you’ll need to follow these basic steps:
• Determine the Reporting Period
This can be a month, quarter, or year depending on your business’s needs and goals, and you can choose the period that best suits your needs.
• Gather Revenue Information
Revenue is the money your business earns from sales, services, or other sources. To complete your P&L statement, you’ll need to gather information on all the revenue earned during the reporting period. This might include sales receipts, invoices, or other financial records.
• Calculate Cost of Goods Sold (COGS)
If your business is product-based, COGS includes the cost of materials, labour, and other expenses directly related to producing the goods sold. Subtracting COGS from revenue gives you the gross profit for the reporting period.
• Determine Operating Expenses
Operating expenses are the costs associated with running your business, such as rent, utilities, salaries, and marketing expenses. To complete your P&L statement, you’ll need to gather information on all the operating expenses incurred during the reporting period.
• Calculate Net Income
Once you’ve calculated your gross profit and determined your operating expenses, you can calculate your net income by subtracting operating expenses from gross profit. This gives you a clear picture of your business’s profitability for the reporting period.
Expense Tracking Software
Keeping accurate records of your expenses is essential for completing your P&L statement and other financial statements. Fortunately, there are many expense tracking software options available to help simplify the process.
Expense tracking software allows you to easily track and categorise your business expenses, making it easier to complete your P&L statement and other financial statements. Some popular expense tracking software options include QuickBooks, Xero, and FreshBooks.
How Lawyers Can Help Complete a P&L Statement
Lawyers can play an important role in helping small businesses complete their P&L statements and understand the financial implications of their legal decisions. Here are a few ways that lawyers can help with P&L statements:
• Reviewing Financial Records
Lawyers can review a small business’s financial records to ensure that they’re accurate and complete. This includes reviewing bank statements, invoices, and other financial documents to make sure that all income and expenses are properly recorded.
• Advising on Tax Implications
This includes providing guidance on which expenses are deductible and which are not, as well as advising on the tax consequences of different business structures (such as sole proprietorships, partnerships, and LLCs).
• Drafting Contracts
Lawyers can draft contracts that accurately reflect a small business’s financial obligations and help ensure that the business is paid on time. This includes drafting contracts with vendors, clients, and other business partners.
• Assisting with Debt Collection
Lawyers can assist small businesses with debt collection by drafting demand letters, filing lawsuits, and negotiating with debtors. This can help small businesses recover the money they’re owed and improve their cash flow.
• Providing Legal Advice on Financial Decisions
Lawyers can provide legal advice on a wide range of financial decisions, including investment decisions, lease agreements, and loan agreements. By providing legal guidance, lawyers can help small businesses make informed decisions that protect their financial interests.
At Mishoura, we can connect you with the top lawyers in your area that can assist in all of these aspects for the financial welfare of your small business.
