A profit and loss statement – also known as an income or operations statement – is a document that gives a snapshot of a particular business’s overall financial position for a given period.
In general, a P&L statement gives an overview of the profits and losses as they pertain to revenues and expenses. With a well-built P&L statement, a company’s leadership and shareholders can gain a clear picture of the financial stability and health of a business.
A profit and loss statement is different from a cash flow statement, and will likely be included in a presentation or audit alongside cash flow documentation. Profit and loss statements are built on accounting principles such as revenue recognition, matching, and accruals that offer a different picture of the business’s performance than a cash flow statement.
What Does A Profit and Loss Statement Include?
A business’s profit and loss statement can be created for a variety of time periods. Many will choose to create P&L statements for monthly and quarterly reviews. Nearly every business will be required to present a P&L statement for auditors and shareholders for a tax year.
There are many items that can be included in a P&L statement, including:
- Revenue/Sales Figures
- Cost of Goods Sold (also known as Cost of Sales)
- Expenses Related To Selling, General & Administrative (SG&A)
- Costs Related To Marketing and Advertising
- Expenses For Technology or Research & Development
- Any Interest Expense
- Tax Figures
- The Business’s Net Income
When Is A Profit and Loss Statement Necessary?
As a business owner, there are a variety of reasons that developing a profit and loss statement is necessary. However, there are particular times when putting together a P&L may be required.
For example, when preparing a business’s tax returns, it will be necessary to submit a full audit report. For an auditor to complete the processing of the business’s financial statements, a profit and loss statement will be required.
Other times you may need a profit and loss statement is for presenting your business’s reporting to investors and shareholders. As part of the overall business strategy, a P&L statement can help give a beneficial overview of the company’s performance for the period that the statement was prepared – especially for those who are trained in how to interpret P&L statement data.
What Can A Profit and Loss Statement Tell You About Your Business?
Beyond acting as a required financial statement for audits and tax purposes, P&L statements are incredibly important for helping relay company health data.
With the help of a professional financial analyst, a P&L statement can be used to give guidance and make recommendations on how a company can move forward effectively in a market. Of the many aspects a P&L statement analysis can reveal, here are a few of the most important:
- A comparison of the year-over-year numbers – known as a horizontal analysis.
- Industry benchmarking data
- Margin Data such as:
- gross profit margin
- EBITDA margin
- operating margin
- net profit margin
- An analysis of trends and metrics for a company’s financial stability and viability
- Various rates of return such as Return on Equity (ROE) and Return on Assets (ROA)
- Valuation metrics such as:
- P/E ratio
- Price to Book
These data points and analysis – and more – can help give insight into a company’s current financial position as well as its ability to function well in the future. This data can be useful if another company is contemplating purchasing the company, or investors are being sought for future engagement.
How Fastlane Can Help With Profit and Loss Statement Development
While there are many benefits to creating a P&L statement, putting them together can be a complex process. Developing a P&L statement may require a good understanding of accounting principles as well as economic analysis. If you are looking for a resource to help your company build a profit and loss statement, contact the team at Fastlane.
At Fastlane, our expert accountants use Xero, an Accounting software to assist clients in building a high-quality profit and loss statement that includes all the necessary benchmarks and data for proper audit analysis.
Contact Fastlane today to learn more about profit and loss statements, as well as a myriad of other business financial strategies and solutions.