A profit and loss statement measures your company’s financial health. Creating one at the end of every financial year is like giving your company an annual physical. See whether you’re profitable and how revenue and expenses change.
This article teaches you how to create and read a profit and loss statement. There’s also a free template to get you started.
What is a profit and loss statement?
A profit and loss (P&L) statement is a financial report that summarizes a company’s revenue and expenses over a given period of time. As the name suggests, it shows whether your business made a profit or loss.
P&L statements are also known as income statements or statements of operations. Companies typically create them every financial quarter or year, but some do so monthly.
Profit and loss statements are valuable for small business owners looking to increase profitability. They’re also a legal requirement for public companies filing with the Securities and Exchange Commission (SEC).
For example, here’s what Nike’s profit and loss statement looks like on Yahoo Finance:
A P&L statement is one of three financial statements public companies issue quarterly or annually. The others are a balance sheet and a cash flow statement.
This table shows how the three report types differ:
Financial document | Purpose |
Profit and loss statement | Summarizes income, costs and expenses |
Balance sheet | Details a company’s assets, liabilities and shareholder equity |
Cash flow statement | Tracks the inflow and outflow of cash through a company’s accounts |
Together, these statements summarize your business’s financial activities, performance and position over a specific period. They help you and your stakeholders understand the company’s financial standing and make informed decisions.
Note: Public companies must follow generally accepted accounting principles (GAAP) when preparing these statements. While private companies aren’t obligated to comply, doing so can maintain consistency and accuracy.
Why are profit and loss statements important?
Profit and loss statements provide financial insights to help business owners make investment, growth and budgetary decisions. There are several reasons small business owners should create and analyze profit and loss statements:
They help you analyze business health and make decisions
A P&L statement and other financial reports enable you to measure and track your business’s financial position. A P&L statement tells you:
Whether you’re profitable
How revenue and expenses change over time
To what extent you’re meeting business goals
Use this information to make data-backed decisions. For example, if the cost to create a product rises, increase prices or discontinue it. If revenue exceeds forecasts, invest in a new geographic area or hire new sales reps.
They attract investment
A P&L statement showcases your company’s profitability and financial health for potential investors. Banks can compare your P&L to public statements and determine risks before approving a loan.
They help you prepare for tax season
Regular and detailed P&L statements make preparing relevant documents easier during tax season. They show your total revenue and income figures for the year, meaning you’re less likely to make a mistake that could result in an audit or penalty. This clear record of expenses allows tax professionals to determine what’s deductible.
Keeping regular statements can also lower your tax liability. For example, if you keep track of your taxable income throughout the fiscal year, take steps to reduce it before April 15 by buying new equipment.
Download our profit and loss statement template
To get started, download our profit and loss statement template. Refer to it as you read this guide and use it to create your report. Use the template in Google or Microsoft and customize it as you see fit.
A multi-step profit and loss report categorizes revenue and expenses. To create a single-step profit and loss statement, list revenue and expenses as single line items and delete the redundant rows.
Download Pipedrive's profit loss statement template
Alternatively, you can use digital accounting software like Quickbooks and Xero to create a profit and loss statement from your bookkeeping.
How to create a profit and loss statement
Generate a profit and loss statement using software or by downloading our template and following the steps below. Before you start:
Choose your reporting period. P&L statements focus on financials for a specific period. Your last financial quarter or year is a good place to start.
Access financial data. Gather all the info you need on your revenue and expenses. Find most of your sales data in a revenue report, which you can generate from accounting software or a customer relationship management (CRM) tool like Pipedrive. Locate expense data in your bookkeeping software or through receipts and bank transactions.
Now, let’s get to work.
1. Choose the right accounting method
There are two accounting methods for preparing your statement. The cash-based accounting method (cash method for short) recognizes revenue and expenses when they enter or leave your bank account. It’s the most straightforward method and a favorite of small businesses.
The accrual-based accounting method (accrual method for short) records revenue as you earn it but before it enters your bank account. The accrual method offers a more comprehensive and accurate view of a company’s profitability. It’s better for quarterly or monthly P&L statements since revenue and expense figures will be accurate.
Your statement’s figures and how you interpret them will change depending on which method you use.
2. Add your revenue
Revenue sits at the top of every profit and loss report. List your revenue under these categories:
Sales. The total revenue you generate from the sales of products and services
Other revenue. All other income sources like rental income and interest
Break your revenue into subcategories (for example, product line or service), and list gross revenue if you wish. Gross revenue is the total of all your business’s income over the period.
Next, list the cost of any returns, refunds and discounts. Subtract these deductions from your gross revenue to calculate net revenue.
Net revenue = Gross revenue − returns, refunds and discounts
Add your net revenue to the statement.
3. Add your cost of goods sold (COGS)
Cost of goods sold (COGS) sits under revenue in the P&L as the direct cost of making products or services. It includes expenses like
Labor
Raw materials
Items purchased for resale
Storage costs
Packaging
If you only sell services, your COGS will include the cost of labor and tools to deliver that service. For example, an outsourced sales development representative (SDR) agency would list the price of a sales CRM and other sales tools like Prospector or DocuSign.
Add up your COGS for the period and enter them on the statement.
4. Calculate gross profit
Gross profit is the amount you earn after subtracting the cost of producing goods or services. Calculate it using this formula:
Gross profit = Net revenue − COGS
5. Tally your expenses
The expenses category lists all the other expenses your business incurs. The template splits expenses into two categories: operating expenses and non-operating expenses.
Operating expenses are the costs of running a business. They include:
Rent
Utilities
Salaries for administrative staff
Marketing and advertising costs
Bank fees
Office supplies
Insurance
Non-operating expenses are costs that don’t relate to your operations. They include:
Legal fees
Accounting fees
Interest
Fines
Foreign currency exchange losses
Investment losses
The template provides space for all the above expenses, but add as many rows as needed.
6. Calculate operating income
Calculate your operating income by subtracting both types of expenses from gross profit. Here’s the formula:
Operating income = Gross profit − Operating expenses − non-operating expenses
The result is your total earnings before interest, taxes, depreciation and amortization (EBITDA).
7. Calculate net earnings
Net earnings (or net income) sit at the bottom of the P&L statement. They are your company’s profits or losses after deducting taxes and other expenses from your operating income.
You’ll need to know your business tax rates to calculate net earnings. Since 2018, the business income tax has been 21% for C corporations. Corporations can calculate taxes as follows:
Taxes = Operating income x .21
Sole proprietorships, partnerships and S corporations use the business owner’s personal tax rate, which is between 10% and 37%.
Subtract your taxes and other non-operating expenses (e.g., legal fees or interest) from your operating income.
Here’s the formula for calculating your net earnings:
Net earnings = Operating income − (Taxes + other non-operating expenses)
8. Review your work
Manually creating a profit and loss statement improves your understanding of revenue and expenses but can also make you more susceptible to mistakes. Double-check every entry and review formulas.
How to read a profit and loss statement
Profit and loss statements may look complex, but learning how to read and analyze them is straightforward.
Work through the report section by section and compare it to previous periods, as shown in the steps below.
1. Evaluate your bottom line
First, look at your statement’s bottom line to determine profitability. If your business is profitable, it’s in the black. If it’s at a loss, you’re in the red.
Everyone wants their business to be in the black, but sometimes a loss is acceptable. For example, buying expensive machinery may tip you into the red. However, increasing your output will make you more profitable in the long run.
Next, determine your net income as a percentage of sales to make it easy to compare your profit across different periods. It is also known as net profit margin and uses this calculation:
Net profit margin = (net profit / total revenue) x 100
Do this for each of your P&L reports to see whether profit margins are going up, down or staying the same. If you have access to the P&Ls of other companies, use this data to benchmark your company against competitors.
Understanding your bottom line is a great way to identify areas for improvement. If your margin is smaller than your competitors, analyze expenses and revenue to decide whether to decrease costs or raise prices.
2. Analyze income
Now that you know if you made a profit, turn your attention to revenue streams. Ask yourself questions like:
Did you generate as much revenue as expected?
Did the bulk of revenue come from one or two products or services?
How did revenue compare to the previous period?
Categorize your P&L’s revenue by individual products or services if you sell more than one to see which sources are most profitable. Consider how to optimize your offering.
For example, you could invest more in your most profitable products or discontinue underperforming ones.
Finally, measure your sales volume variance (the change in sales over a period of time) to determine the accuracy of your forecasts. Did sales match estimates for the year or quarter?
Exceeding your forecast suggests a higher demand for your products than you thought. Failing to meet targets means you may need to reassess your sales process.
Note: Consider your accounting method when analyzing income since it needs more work. For instance, if you use cash-based accounting (logging revenue when it comes in rather than when you made the sale), a month’s income may come from work completed several months earlier.
3. Check expenses
A close look at your expenses can highlight whether you need to make budget cuts or raise the price of your products to keep up with increasing costs.
If your business suffered a net loss, see if there’s an opportunity to profit next quarter by reducing expenses. For example, you could trim the marketing budget or eliminate a non-essential software product.
Rising expenses aren’t necessarily a concern if revenue is increasing, however. Check if your cost of goods sold (COGS) growth correlates with increased revenue.
If you’re generating more revenue, COGS should increase. The opposite is also true: if you’re making less money, COGS should fall. If either of those scenarios doesn’t happen, that’s a cause for concern meriting further investigation.
4. Compare to previous periods
Compare this period’s P&L to previous accounting periods to highlight changes in revenue, operating costs and profit.
For example, see if certain expenses grow faster than others or if total expenditures exceed revenue growth. A sudden change from one year to the next may have an obvious cause (like the pandemic, for example), but try to mitigate the impact of long-term issues.
Ensure you’re making like-to-like comparisons. For example, compare a P&L from April 2022 with a P&L from April 2023 or a Q1 report from 2020 to a Q1 report from 2021. Doing so accounts for seasonality and other factors that cause quarterly reports to fluctuate.
5. Review your budget vs. actual profit and loss
Compare current profit and loss statements against your forecasts from the start of the year to see whether you’re aligned to hit targets.
Calculating it every month or quarter lets you adjust your budget if you aren’t on track to meet goals. For instance, you might invest more in marketing if revenue is down.
Finally, account for seasonal fluctuations when making budget comparisons. If Q3 is always your best-performing quarter, don’t redo your budget because of a less-than-stellar Q1 and Q2.
Final thoughts
A profit and loss statement is a vital financial tool. It summarizes revenue, costs and expenses over a given period.
Profit and loss statements are only as accurate as your data, however. Use tools and software to monitor your revenue and expenses.
A CRM can help you track revenue to run efficient, error-free reports. Get started today by trying Pipedrive’s CRM free for 14 days.
