Checklist: How to prepare a profit and loss (P&L) statement

What is managing a P&L?
Businesses need to make informed decisions. Many of those decisions are only possible through a careful review of a profit and loss statement. Managing a P&L involves the responsibility of modeling expenditure, monitoring financial target progress, and informing others of about what you learn. Someone has to be held accountable for the performance of a business. Filing tax returns, communicating with shareholders, and making management decisions depend on the responsible management of a profit and loss statement. The responsibility of managing a P&L is what underpins all financial accountability within a business, as well as creates an accurate record of that business’s performance.How to calculate profit and loss
How you use your P&L statement affects the level of detail required to create the statement. You may choose to monitor only a high-level overview of the business, or you may want to break down data by department or product line to pinpoint income and expenditure more precisely. Establish recording systems. Effective systems and procedures need to be set up to record the necessary information for inclusion in your P&L statement. Consider where you can gain efficiencies in preparing these statements; your time is precious and should be used making business decisions.1. Gather your data
● All sales invoiced for the period. Sales are based on the date of the sale or invoice date, and not on the actual date on which the customer pays. ● Expenses generated. This includes administrative expenses, R&D expenses, interest, taxes ● The value of any stock held. The value should reflect the opening and closing balances. The closing balance may be higher or lower than the opening balance, depending on the sales and purchasing activities during the period. ● All purchases and operating expenses (overhead and labor associated with your business operations – rent, inventory, marketing budget, payroll), except capital items (e.g. machinery or furniture) à these end up on your balance sheet ● Depreciation expense of your capital items (i.e. equipment, property, buildings, etc).2. Check accuracy
Ensure your figures are correct. Do not include purchases of items that are classified as capital expenditures, such as company vehicles or equipment as they are not directly related to day-to-day operations. You can, however, include an amount to cover the depreciation of the capital items.3. Prepare the statement
Once you have gathered all the information required, you are ready to produce your P&L statement. Also read our article on cash flow statements to learn more about the financial health of your business.4. Ensure regular preparation of P&L statements
To keep tight control on your business financials, a new P&L statement should be prepared at the end of each month. Some small businesses opt to prepare statements more infrequently, for example, quarterly or half-yearly.5. Investigate discrepancies and reconcile
Check for any discrepancies revealed by your P&L statement. Careful monitoring will enable you to identify issues that can impact financial results.6. Analyze
Now that you have your statement prepared, how do you use the data to make business decisions? Consider metrics like gross margin, operating margin, net profit margin, ROE/ROA, inventory turnover to understand the health and direction of your business. Editor’s note: This article was originally published December 2017 and has been updated for relevance.Get your cash flow template
Our easy-to-use template will help you understand the cash coming in and going out of your business so you can make smarter decisions.
