How to Run an Effective Profit and Loss Report
As a business owner, you’ve probably heard a lot about profit and loss reports. But what exactly are these reports, and why are they so important to the livelihood of your business? If you’re new to profit and loss reports, check out our guide to learn everything you need to know about optimizing your results and getting the most out of this essential financial statement.
What Is a Profit and Loss Report?
Before we talk about how to create a profit and loss report, let’s cover the basics with a profit and loss report definition.
Also known as a profit and loss statement or income statement, a profit and loss report is a type of financial report detailing a company’s income, costs, and expenses, in order to determine the profits and losses for any given time period. Most profit and loss reports are created to measure the finances of a particular quarter, month, or year.
This report helps business leaders decide how to spend money, identify revenue streams, and ultimately become more profitable.
When Do You Need a Profit and Loss Report?
So when should you create a profit and loss detail report? Most successful businesses prepare this type of report every month, but there may be other instances when the report could be helpful.
For example, it’s smart to create a profit and loss report when starting a new business segment, or product line, in order to project future finances (this is called a pro forma profit and loss report).
What Are the Benefits of Creating a Profit and Loss Report?
Profit and loss reports are required by the IRS—but there are many other reasons you should care about this type of income statement. Here are just a few of the benefits to consider.
1. Find Out If Your Business Is Profitable
Some believe their company is profitable if they have cash in the bank, but at times that can be temporary and may hide actual losses. Every company’s ultimate goal is to be profitable. And with some business models it takes many years to get to this point, it’s important to find out if you’re on track to make a profit—or if you’ve fallen off the rails. By creating regular profit and loss reports, you’ll be able to make smart business decisions that improve your bottom line.
2. Decide if Your Business Model is Sustainable
You may be making a profit now, but are you growing too fast, too soon? Are there unforeseen expenses that could cause your business to go under? A profit and loss report will help you determine if your business model is sustainable for the future.
3. Identify Top Revenue Streams
If you have many forms of revenue coming into your business, it can be difficult to determine which ones are the most important to pay attention to. This report can help you identify top revenue streams, so you can focus your efforts on the streams that are the most impactful.
4. Learn Your Gross Margin
A profit and loss report unveils your gross margin, which tells you whether your sales are enough to cover the costs of selling the product. Knowing your gross margin can help you increase efficiency and make wise decisions about labor, supply chains, and more. If you set it up correctly, you should run an income statement by product or channel so that you can determine whether you’re making money with that product or in that channel.
5. Identify Your Top Spending Categories
Sometimes a relatively small expense could end up costing your business a lot of money in the long run. By regularly creating profit and loss reports, you’ll be able to identify your top spending categories so you can decide where to cut costs and allocate resources.
What Do You Need to Create a Profit and Loss Report?
The overall formula for a profit and loss report is fairly simple: Subtract expenses from revenue to find out your profit. To calculate this amount, you’ll need to know several numbers, including your operating income, cost of goods sold, and more.
Here are the basic elements of a profit and loss report:
- Cost of Goods Sold
- Gross Profit
- Operating Income
- Operating Expenses
- Net Profit
How to Create a Profit and Loss Report
There are a few ways to go about creating a profit and loss report. You can easily create one in a bookkeeping program, such as QuickBooks, Xero, or FreshBooks. Or you can hire a bookkeeper, accountant, or other finance professional to create one for you.
If neither of these is a viable option, you can also create your own report using an online profit and loss template.
Tips for Running an Effective Profit and Loss Report
Almost any company can whip up a quick profit and loss report. But in order to make your report truly effective, it’s important to pay attention to the details.
Here are some tips on running a profit and loss report that actually helps your business.
1. Include All Possible Expenses
It’s easy to underestimate expenses, which is why the most effective profit and loss reports consider all possible expenditures—and even overestimate expenses, if necessary. This will add room for a margin of error in the future and give you a better prediction of your actual profits.
2. Compare Reports Over Time
Your profit and loss report will be far more effective if you compare reports over time. This will show you the improvements you’ve made in your finances and help you more accurately forecast profits and expenses for the future. Most reporting can be made better by showing trends.
3. Condense Expense Categories
Do you have several similar expense categories? If so, it’s best to group these categories together to get a more accurate representation of your expenses. This will also make it easier to interpret your report and look back on it later, since categories will be grouped in a logical sequence.
4. Report Revenue in Percentages
Even the most comprehensive profit and loss report will be useless if you don’t understand the context of the data. Make sure you report numbers in percentages to see how they relate to other financial aspects of the business.
5. Save Time by Outsourcing
Preparing a profit and loss report takes time. There’s no way around it. For many businesses, extra time is not something you have in large supply, but with something as important as these reports, you need to get them done right. It may be worthwhile to outsource your profit and loss reports so that you can focus on running your company.
Outsource Your Profit and Loss Reports with Amplēo
Profit and loss reports are one of the best ways to get a pulse on the health of your business—but it takes the right formatting and strategy to get the most out of your report.
If you’re overwhelmed by the prospect of running your own profit and loss reports, contact Amplēo today to learn about our wide range of financial services. From accounting and bookkeeping to CFO services, we’re eager to help streamline your business with our financial solutions.