Is your business making money or is it losing money? Are you overspending and underearning?
I know what you’re thinking: “OMG Andi! Stop asking me these questions.”
If you have a meltdown every time someone asks you about your numbers then it’s time to start running a profit and loss statement for your small business. Now, before you say, “Dude, I don’t know how to read a report with a bunch of numbers on it!” don’t worry. I’m going to tell you everything you need to know about running and reading a profit and loss statement!
After this post, you’ll know exactly what a profit and loss statement is, how to read it, and how to use your report to strategize in your business.
This post contains affiliate links to products that I use, know, and love! Affiliate links mean that if you sign up for something through my link I receive a small commission. I only recommend products that I have tested, use for myself or for my clients.!
What is a profit and loss statement?
Let’s start with the basics. A profit and loss statement shows you all the money you’ve made, all the money you’ve spent, and the difference for any given time period. The difference between what you’ve made and what you’ve spent will either be your profit or a loss.
If you made more than you spent, you’ll have a profit. If you spent more than you made, you’ll have a loss.
A profit and loss statement is one of the most common small business reports. You use this report to gauge the financial health of your business and your business model. I’ll share more about how you do that later.
Also, a profit and loss statement is usually the report you use to prepare your taxes or send to a tax preparer, apply for a business loan, and even for a mortgage. Which is why… it’s super important that you get familiar with your profit and loss statement.
How to run a profit and loss statement
If you’re using a bookkeeping program, then running a profit and loss report is quick and easy. Pretty much every bookkeeping program allows you to run a profit and loss report. I’ve linked to a video tutorial that walks you through how to run a profit and loss report in QuickBooks Online. And I also go in depth about more advanced profit and loss reports in my QuickBooks Online training- Quick & Dirty QuickBooks.
What if you’re using a spreadsheet or paper ledger to track your business finances?
You’ll have to manually create a profit and loss statement using a template. I’ve linked to a free spreadsheet template below to create a profit and loss statement if you don’t have access to a bookkeeping program.
The other thing to know about running a profit and loss statement is that you can run this report for any given time period. A monthly profit and loss statement is extremely common for small businesses and it’s best practice to review your profit and loss statement every month.
But, you can also run a profit and loss statement for a fiscal quarter, a year, or even a custom date range. Since the time frame of a profit and loss statement is variable, so is the data. For example, you could run a report for the first week of the month and have a loss- which can be shocking! But, if you run the report for an entire month, then you could have a profit because the report only captures the income and expenses during the time period. Before you get too carried away about what the report means, be sure you understand the time frames that the report is showing.
How to Read a Profit & Loss Statement
A profit and loss statement is divided up into different sections.
The first section of a profit and loss statement is the income section. This section shows you all the income that you made for the reporting period for each income category. This is great because you can see how much each area of your business is earning and also how much your business has earned in total.
On your profit and loss statement, the income is all the money you make BEFORE expenses or costs of goods. This is just pure revenue that’s coming into your business.
Costs of Goods Sold
The next section is the cost of goods sold, which is also known as COGs. COGs are the costs that are directly related to products that you manufacturer, like raw materials and labor. COGs can also be the cost of inventory you resell. Some businesses have these costs and some don’t. If you run your report and don’t see it, don’t worry.
If you do have COGS, they will show up as the second section of your profit and loss statement. Here you’ll see how much your costs were for each category and then your total costs.
Right under the Costs of Goods Sold section, there’s a line that shows you your gross profit. Your gross profit is your income minus your costs. This is really helpful to know because your costs are required for you to sell your products. Ideally, you’ve priced your products to include the costs plus a markup. The gross profit section of your profit and loss report shows you just what you’ve profited on your income. This helps you see how much of your costs have eaten up your income.
The next section of the profit and loss statement is your expenses! Unlike COGs, which are costs directly related to whatever you sell, your expenses refer to your operating expenses. These are the global expenses you incur to keep your business operational. On a profit and loss report, you’ll see your expenses for every expense category and at the very bottom, your total expenses.
The last section of the report is your net income. This is arguably one of the most important parts of your report because it shows you if your business has a profit or a loss. If the number is positive, it means you have a profit and you made more money than you spent. If it’s a negative number it means you have a loss, and your business spent more money than you made.
Using Your Report to Strategize
Right now your profit and loss statement might feel like just a bunch of random numbers sectioned off, but you can use the report to make key decisions in your business. Whenever I look at a profit and loss statement, I ask myself the following questions.
For my income, I ask:
- What was my top earning income category this month?
- What was my lowest earning income category this month?
- What was my top and lowest income categories last month?
This is where the strategy comes in. If I consistently have the same lowest earning income category month to month then I know that I either need to boost my marketing efforts with the category or get rid of it altogether because it isn’t helping my business.
If I consistently have the same highest earning income category, then I can ask myself if I want to spend more of my time and energy focusing on this income category because it’s clearly a hit, or maybe I want to focus less energy on it because it’s doing so well and focus on other areas. Maybe I could just let it passively run on its own.
Regardless of what you decide, the key is that you’re asking yourself these big overarching questions in your business and being proactive about the direction of your business.
For the cost of goods sold section, I ask:
- What percentage of my total income does my Cost of Goods sold take up? And I find that out by dividing my total cost of goods sold by my total income.
- Is this sustainable for my business?
For example, if your costs are taking up 70% of your income, then there’s very little money left for your operating costs and to pay yourself. In this case, your costs aren’t sustainable for your business. That means you either need to lower your costs or increase your prices.
For my expenses, I ask:
- What was my highest spending expense category?
With this question, you’re really assessing WHERE you’re spending your money and if it makes sense to spend money in these areas. Sometimes we DO spend a lot of money in one area of our business because we’re trying to grow- and that’s okay. You may look at your spending and think, “This makes sense,” or you may look at your spending and think, “Girl, you better simmer down.”
For my net income I ask:
- Was I profitable? As in, did I make more money than I spent?
- Did I profit enough?
Our profits are what we live off of as a small business owner. Even if you profit, it might not be enough for you to live off of, pay down your business debt, save for taxes, or invest in your small business. You probably have a number that you know you need to make to live off of. When you look at your net income- is it enough?
If it’s not enough, can you lower your spending? Remember, your profit and loss statement gives you a snapshot of your spending. You can use the report to assess each spending category and see WHERE you can lower your spending.
Can you increase your income? Again, use your report to see where you can boost your income or if you’re putting too much energy into low-earning products or services.
I have something super special for you- a free profit and loss template! It’s free and you can use it every month to get clear on your numbers so you can strategize better in your business, and make healthy financial decisions for your business.