Simple Profit and Loss Statement
Do the majority of small businesses fail because of lack of capital?
According to Bloomberg, 8 out of 10 entrepreneurs who start businesses fail within the first 18 months. That’s a whopping 80%!
But why? What can you learn from all of those failing companies that you can apply to your own business so you can improve your chances of success?
Let me be the first to say that one of the main reasons businesses fail is because they run out of cash. So having access to business credit lines and funding sources is an essential component to long lasting success but it’s not the only thing that’s important.
Another key ingredient is knowing your numbers.
In a recent article that I wrote for the SBA titled the ‘5 Pillars of Small Business Success’, I went over the importance of having a profitable business model. Without nailing down your numbers your business can end up on the chopping block. Bill Gates co- founder of Microsoft says “Know your numbers; it is a fundamental precept of business.”
In today’s post we’ll go over how to make a profit and loss statement (P&L) also known as the net income statement. Now if you’re not a numbers person don’t worry because after reading this you’ll know exactly how to make a profit and loss statement. I’ve even included a free P&L excel worksheet that you can download that does all the calculations for you.
First things first, the three major numbers that measure the vital signs of your business are your profit and loss statement, your cash flow statement, and your balance sheet. Having these numbers is not only vital to managing your business but is also important in getting business funding. Certain lenders will require reviewing your company’s P&L statement when applying for a loan.
Making a Profit and Loss Statement
The profit and loss statement will show whether or not your business is making money, breaking even, or losing money. Let’s break down the entire P&L statement:
- Net revenue – This is the money coming into your business from sales
- Subtract: Cost of goods sold (COGS) – These are the hard costs to produce your product/service
- Gross margin – This is what’s left before operating expenses
- Subtract: Fixed expenses – These are fixed regular expenses such as rent and insurance
- Subtract: Variable expenses – These are variable expenses such as marketing and travel
- Earnings before taxes (EBT) – This is the amount before taxes are deducted.
- Subtract: Taxes – These are expenses that you must pay
- Net income – The amount that is left over is the bottom line or net income. It shows if you’re profitable, breaking even or losing money.
Let’s do a sample profit and loss statement using the P&L worksheet. In the net revenue section Product/Service 1 enter $5,000 in sales for the current period. In the cost of goods section in Product/Service 1 enter $1,500. You should see a gross margin for the current period totaling $3,500
Next, for simplicity under the variable expenses section enter $500 for advertising and in the fixed expenses enter $1,500 for rent. You should then see a total of $1,500 in the earnings before taxes (EBT) section.
Finally, enter $750 for total taxes in the taxes section and you should see a net income of $750. Since the net income is positive the business is profitable. If the net income was negative then the business is losing money.
The power of knowing your numbers is crucial to running a profitable business. It allows you to make the necessary adjustments so you can show a profit. If you ever watched popular TV shows like Shark Tank or The Profit you’ll always hear them talk about the numbers. Numbers don’t lie and they tell everything about the health of a business.
At the end of the day, your CPA is not going to manage your business you are. “If you want to be successful at managing a business, you need to be able to read and understand your financial dashboard.” says Dawn Fotopulus, author of Accounting for the Numberphobic.
When you know your numbers you have a tremendous advantage over those who don’t. Your profit and loss statement tells a story – and understanding the story behind your numbers can be an extremely important factor for achieving success in business.
Until next time…
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About the author
Marco Carbajo is a business credit expert, author, speaker, and founder of the Business Credit Insiders Circle. He is a business credit blogger for Dun and Bradstreet Credibility Corp, the SBA.gov Community, About.com and All Business.com. His articles and blog; Business Credit Blogger.com, have been featured in ‘Fox Small Business’,’American Express Small Business’, ‘Business Week’, ‘The Washington Post’, ‘The New York Times’, ‘The San Francisco Tribune’,‘Alltop’, and ‘Entrepreneur Connect’.