Stop right there, small business owner! Don’t let your eyes glaze over just yet. Yes, “profit and loss statement” may sound like something that only concerns Wall Street traders or that strange group from the accounting department who always ate lunch together back when you worked in the corporate world.
But profit and loss statements are not just for financial types, and believe it or not, now that you are a small business owner, they can actually be one of your very best friends.
Profit and loss statements are precisely what they sound like, an accurate record of a business’s profits and losses. Perhaps a simpler way to think of it is as a record of your business’s income and expenses. In fact, “income and expense statement” means exactly the same thing as “profit and loss statement,” so don’t be confused if you hear the two terms (along with “P&L” for profit and loss) bandied about interchangeably by financial types.
Categories on Profit and Loss Statements
Income and expenses are listed on a profit and loss statement in easy to interpret categories. This is because, in many cases, the profit and loss statement is not for you. It’s for your accountant, who needs to know where your money is going to make sure that she’s filing your taxes properly, or, in the worst case scenario, for the IRS. It’s a sad fact that small business owners are often an interesting target when it comes to audits. So when the tax man comes around, it’s doubtful that you want mysterious categories like “Antarctic Expedition” or “Miniature Pony Rides” listed in your expenses unless you have a very good explanation.
Income is generally the easy part of your profit and loss statement. Income includes the revenue you made through providing your service, producing goods, etc. You may also have some revenue through uncommon streams, like the income received from rent or selling intellectual property rights.
Expenses, on the other hand, usually include many categories and can get quite tricky. Categories might include advertising, office space, equipment, supplies, printing and postage, accounting services, graphic design services and the many other things you justifiably spend your business’s money on. The tricky part comes in for small business owners who may work from home or have trouble delineating business and personal space, equipment and expenses. (Look for posts covering those topics and more right here in the future.)
Profit and Loss Statements: The Small Business Owner’s Friend
So yes, accountants, the IRS and other financial types need your profit and loss statements. But so do you. Shane Pearlman over at FreelanceSwitch.com blogged about how he doubled his income in one year after he started regularly creating and reviewing his profit and loss statements. Reviewing your P&L can help you see where you may be overspending or when you are putting a lot of money into a service that just isn’t offering a worthwhile return.
If you own a small business, profit and loss statements are going to be a part of your life. Let's make them easy.
