Why Is It Essential To Keep A Profit & Loss Statement For Your Business?
Well it really does give an accurate picture of your most profitable revenue stream and identifies where expenses are support that or can maybe be reduced to increase overall profitability.
An accurate Profit & Loss Statement will help you with tax preparation and although you may feel initially that it’s time consuming – and time is money – it’s a smart investment for several reasons, not least of all it saves all that backtracking as you (desperately?) try to remember to claim for all the ‘investments’ (if they turned out to just be ‘bright shiny objects’ – the tax deduction may be the only benefit you get, so you need to be double sure you claim for those) that you’ve made in your business throughout the year.
Reasons To Keep A Monthly P&L Statement
- If you’re not using a regular accounting system such as Fresh Books or Quick Books (which is an excellent but full featured accounting program so it can be a bit of overkill for a small business just starting out) then you can use a spreadsheet P&L to clearly identify where revenue comes in and expenses go out. The truth about your business is always right there in the bottom line!
- It will save you time and money when you come to complete and submit quarterly and annual tax returns because all the figures will be right there on the P&L for you to simply complete forms online or on paper.
- It will save you a ton of money on accountant fees as you will be able to provide a clear, legible road map for your accountant or book keeper to cross reference and reconcile with paper statements – hopefully you’re not dropping those off in a shoe box your cat’s been sleeping in!
- Not least of all if or when you ever come to sell your business you will have archived versions of annual P&L statement to confirm and verify the growth and sustainability and therefore the value of your business. When this level of detail is clearly presented it helps them see you are not trying to hide anything and typically give them confidence it has been well run and properly organized.
The example P&L in the video was created using the simplest form of reporting on a Cash Basis – that means income and expenses are entered on the date received or paid.
Cash Basis Accounting:
The cash method is the more commonly used method of accounting in small business. Under the cash method, income is not counted until cash (or a check) is actually received, and expenses are not counted until they are actually paid.
You deliver a website to a client June 15th and invoice them for the work done. The client pays you July 7th. Under the cash accounting method, you would record the revenue in July when you actually received it.
This P&L statement is pretty basic but it does address the most common revenue streams and expenses for an online business. It’s easily customized for your specific business just by adding or changing the line item descriptions as needed.
Start by entering revenue received from each income stream. It’s really important to put each stream on its own line or row – because it makes it so much easier to reconcile with 3rd party supporting documents such as your merchant account statements.
Pay special attention if you have Amazon income or any income that has fees taken out BEFORE you receive payment. You STILL need to break out every item either in the revenue or expense section. Statements can be confusing if you use say FBA (fulfilled by Amazon) services as you’ll have columns for revenue, refunds and rebates and shipping revenue too, by logging them into the spreadsheet separately you should always be able to reconcile them to the penny to printed or online statements.
Moving on to expenses, this is pretty simple stuff you enter the amount paid into each cell – it’s helpful to use the commenting feature on Excel so that you can note a breakdown if the total is for several items that it makes sense to log in one category. For example SAAS (Software As A Service) in the example shows an expense of $68 but it’s actually two payments combined $19 to AWeber and $49 to GoToMeeting. This will make it helpful to show anyone else (your accountant/book keeper or a potential buyer) exactly what each item is for. Excel then puts a little red flag in the cell to show there is a note and if you mouse over it a fly-out window will show the note details. You can always edit or delete the notes too if needed.
The bottom line on a P&L shows the actual ‘net’ profit your business is generating at any given time. At the risk of sounding like a broken record, this is a rudimentary P&L Statement and as such it’s the very least accounting that any website owner should be running to ensure they are actually running at a profit. It’s shocking and very sad to see how many people are blasting along thinking they’re making a profit when in fact they’re not because they’re not keeping close enough tabs on expenses.
Pay very close attention to that bottom line, if you enter everything in monthly it will always tell the truth about the health of your business. You can then use the P&L to identify exactly which products, services or content is generating revenue and also where you may need or be able to nip and tuck expenses to increase net profits too.