A p&l statement shows a company’s profits or losses for a specific period. It compares the company’s total income and expenses. This is important as it can indicate where a company can increase revenue either by cutting costs or increasing sales.
An income statement can also be known as a p&l statement. There is no difference between the two whereas, a balance sheet is used to give a quick overview of the company’s financial information. This is usually a broader view showing such things as assets, liabilities and income. However, an income statement is more useful in showing specific details of cash flow.
I have seen several start up businesses struggle with p&l statements as not all information is included to give an accurate view of the company’s financial health.
I suggest to my clients to get set up on cloud based accounting software such as Xero or Quickbooks. This makes creating p&l statements a lot easier as most of the calculations are automated from receipts and invoices therefore it is less likely for anything to be missed or calculated incorrectly.
As it is cloud based, I am able to log into the client’s account and check everything has been entered correctly or even create the statement for them. They will then be able to view their statement in various formats such as bar chars or line graphs. This makes it easier for the business owner to make decisions quicker.
P&l statements need to include the total income the business has made from its day to day operations.
The cost of goods sold (also known as COGS) must also be included. This is the cost of the goods or services that the company sells i.e the price to make a product including materials and labour costs.
The company’s expenses should be accounted for which includes rent, equipment costs, depreciation expenses if applicable and admin expenses. This is not an exhaustive list of company expenses which can be added to the P&l statement.
Gross profit should be entered next which is the company’s gross profit less COGS.
Finally, net profit needs to be added which is Gross profit less expenses. As this is the final line of the p&l statement, the total will indicate how much profit or loss the company has made in that particular period.
P&L statements can be applied to various time scales such as annually, quarterly or even monthly. Many businesses struggle with the concept of accruals and prepayments and whether they should be included in the statement especially if the statement is reporting at quarter or year end. Business owners may also calculate net and gross income incorrectly therefore it is a good idea to outsource accounting tasks or get an accountant to check everything is correct.
P&l statements can be a great way to view the current financial status of the company and understand if there is a cause for concern in certain areas of expenditure or if the owner can afford to make future decisions to grow.
A healthy P&l statement can also attract investors to help with company growth.
Francis Fabrizi
Accountant
Keirstone Limited
