Guide to Profit and Loss Statements for SMBs With Examples — Backoffice (2022)

Have you ever won a sweepstakes? Found $50 on the street? If you have, chances are you enjoyed the experience. The mind hates loss, but it absolutely loves gain.

For business owners, calculating profits isn’t as simple as grabbing a $50 bill from the drain. Running a business costs money—from marketing expenses and materials to wages and investments in machinery. With cash constantly flowing in and out of your account, it’s hard to know at a glance exactly how much money you’re making.

A profit and loss statement is a financial report that measures a company’s profitability. By categorizing revenues and expenses over a period of time, these statements show the company whether it is making or losing money. This helps business owners identify trends, increase profitability and predict future changes in net income.

What is a profit and loss statement?

A profit and loss statement is a financial report that shows a company’s income and expenses over a period of time, such as a month, quarter or fiscal year. The statement includes both revenue and expenses and calculates the total profit or loss of the business over the given reporting period. It is also sometimes referred to as an income statement, profit statement, or statement of operations.

How does a profit and loss statement work?

A profit and loss statement summarizes all the money a business has made (income) or lost (expenses) over a period of time. This statement includes operating and non-operating revenue, operating expenses incurred, cost of goods sold (COGS), taxes and non-operating expenses. Most businesses generate quarterly and annual profit and loss statements, with some business owners also choosing to separate shorter or longer time periods.

Operating results

Revenue is one of the main categories on the profit and loss statement, and it is divided into operating revenue and non-operating revenue. Operating income is the first number listed on the profit and loss statement and it represents the money the business brings in during the reporting period by performing its core functions, such as selling vintage lunch boxes or doing custom paint work on bicycles.

Cost of goods sold

Cost of goods sold refers to the direct costs associated with a business’ product or service, such as the materials and labor required to build a two-story dog ​​house. Service-based companies typically do not report cost of goods sold, but instead report cost of revenue or cost of services. This could include licensing the software needed to produce the consulting deck or the manpower needed to stage Macbeth. Although cost of goods sold represents an expense incurred, this amount is listed separately from expenses on the income statement.

Gross profit

Gross profit, which is calculated using the g formulaGood luck Ross = revenue – cost of goods sold, appear on the profit and loss statement after cost of goods sold. This number shows the company’s profit before operating and non-operating expenses are calculated, and it can help you identify if you are pricing your products accordingly.

Operating expenses

The third major category on the profit and loss statement is expenses incurred. Expenses are divided into operating expenses and non-operating expenses, with operating expenses being classified as expenses that are necessary for the business to perform its daily functions. This includes salary and administrative expenses, office supply costs, marketing and research costs, rent and equipment repair costs.

These expenses are listed on the income statement under cost of goods sold and are used to calculate net operating profit through a formulanet operational profilet = gross profit – operating expenses.

Non-operating expenses and income

Non-operating income and expenses are listed under net operating profit on the income statement. Non-operating expenses are usually non-recurring and not directly related to core business functions. They may include investment losses or interest payments, write-offs of lost assets, costs related to business restructuring or costs related to disasters, such as a flooded workspace or a malfunctioning freezer.

Non-operating revenue represents income generated by something other than the performance of core business functions. It can include rental income, interest earned from investments and money earned from the sale of company assets.

Tax

The profit and loss statement also includes tax obligations. Your statement will include the amount of profit or loss before tax and the tax liability payable during the reporting period.

Net income

The final number on the profit and loss statement, net income, represents the amount of money gained or lost during the reporting period. Net income is also referred to as the bottom line. The formula for calculating net income is revenue – cost of goods sold – operating expenses – not-operating expenses + non-operating revenue – tax liability = net income.

That’s a pretty tricky formula to use, but the profit-and-loss template simplifies things by following a consistent order and entering the following intermediate amounts:

• Gross profit = revenue – cost of goods sold

• Operating profit = gross profit – operating expenses

• Total income before tax = operating profit – non-operating expenses + non-operating income

Therefore, the final net income calculation usually reads net income = total income before tax – tax liability.

Each of these amounts provides discrete information about your profit before the various categories of additional expenses are taken into account.

Profit and loss statement vs. cash flow statement

Like the profit and loss statement, the cash flow statement deals with money coming in and out of the business over a period of time. However, the cash flow statement has a more limited scope, dealing only with transactions that affect the business cash balance. They also have different starting and ending points: while the profit and loss statement starts with revenue and ends with net income, the cash flow statement starts with net income and measures the increase and decrease in cash to arrive at the ending cash balance.

Profit and loss statement vs. balance sheet

The key to understanding the difference between a profit and loss statement and a balance sheet is timing: while a profit and loss statement shows net income over a period of time, a balance sheet is a snapshot of a company’s financial position at a particular point in time. Your balance sheet measures current assets and liabilities, but it doesn’t tell you whether or not you’ve made or lost money this month, quarter or year.

Example of profit and loss statement

Profit and loss statements follow a pattern, and profit and loss templates can simplify the generation of these statements. Here is an example of a quarterly statement, produced for a fictional business that carves statues of presidents out of potatoes.

Operating results
	$43,000
Cost of goods sold
	$67
	$17,933
Total cost of goods sold = $17,000
Gross profit = revenue – cost of goods sold = $25,000
Operating expenses
	$1,275
	$8
	$300
	$250
Total operating expenses = $1,833
Operating profit = gross profit – operating expenses = $23.167
not-operating expenses	$0
Non-operating income	$0
Total income before tax = operating profit – non-operating expenses + non-operating income = $23,167
tax expense	$6,950
Net income = total pre-tax income – tax expenses = $16,217

Because the business brings in more cash as a result than is spent on cost of goods sold and operating expenses, non-operating expenses and taxes, the business shows a positive net income or profit. If the expenses exceed the income, the profit and loss statement will show a negative net income or loss.

Final thoughts

Whether you’re working towards profitability or planning a major acquisition, generating a regular profit and loss statement can help you assess the strengths and weaknesses of your business and adjust accordingly. This positions you for future growth.

By separating operating expenses, which you can expect to incur repeatedly, from non-operating expenses, which are not expected to recur, it can help you identify whether changes in financial performance are due to bad luck (a tornado ripped through your orchid nursery ) or a fundamental problem with your business model (the shipping cost of your orchids is higher than your sales revenue).

Maintaining these key financial reports can help you monitor your progress and develop business development strategies that maximize your profits and move you toward your business goals.

source: https://www.shopify.co.id/blog/profit-and-loss-statements