How to create and analyze a profit and loss statement

Staying on top of your business finances requires tracking key financial documents, including your profit and loss statement (P&L statement). Understanding how to create and analyze a P&L statement helps business owners gauge company profitability, manage expenses, and make informed decisions.

What is a profit and loss statement?

A profit and loss statement—also called an income statement or statement of operations—is a financial report that summarizes your company’s revenues, total expenses, and net profit over a specific period. This period could be monthly, quarterly, or annually. A P&L statement provides insight into business operations, financial health, and profitability.

A P&L statement is one of three essential financial statements, along with the balance sheet and cash flow statement, required for accurate bookkeeping and financial reporting.

Single-step vs. multi-step profit and loss statements

There are two primary formats for profit and loss statements: Single-step and multi-step. Choosing the right format depends on your business’s complexity and reporting needs.

Single-step

This calculates net income using a single formula:

Total Revenue - Total Expenses

A single-step P&L statement is simpler and is best for small businesses or companies with straightforward financial structures.

Multi-step

A multi-step P&L statement separates operating and non-operating activities, providing detailed insights into gross profit, operating income, and net income. This format is preferred by larger businesses or those needing deeper financial analysis. If your business has multiple revenue streams, significant operating expenses, or external investments, a multi-step statement can provide clearer insights.

How to make a profit and loss statement

Most small business owners use a spreadsheet program such as Excel or accounting software such as QuickBooks to generate financial statements. However, you can also create one using a profit and loss statement template by following these steps:

1. Gather financial data

Collection your financial data to produce a precise profit and loss statement. This should include:

• Bank account and credit card statements
• Receivables and payables
• Sales records
• Payroll and operating expenses
• Liabilities and deductible expenses

2. Choose a reporting period

Decide if your statement will cover a specific period, such as a month, quarter, or year. Choosing the appropriate timeframe allows you to analyze trends and make data-driven decisions.

3. Calculate total revenue

List all company revenues, including:

• Product and service sales
• Investment income
• Other business revenue sources

4. Subtract cost of goods sold (COGS) to find your gross profit

Cost of goods sold (COGS) includes expenditures directly related to production, such as:

• Raw materials
• Labor costs
• Manufacturing overhead

The gross profit formula is:

Gross Profit = Total Revenue - COGS

5. List operating expenses

Operating expenses include:

• Payroll
• Rent and utilities
• Marketing and advertising
• Research and development (R&D)
• General and administrative (G&A) expenses
• Accounting software costs

6. Calculate operating profit

Operating profit, also called operating income, represents earnings before interest and taxes.

The operating profit formula is:

Operating Profit = Gross Profit - Total Operating Expenses

7. Include non-operating income and expenses

Adjust for:

• Interest income and dividends earned
• Interest expenses
• One-time gains or losses, such as asset sales

8. Deduct taxes, depreciation, and amortization

• Depreciation and amortization: Account for asset costs over time
• Income taxes: Must be deducted to determine net income

9. Calculate net profit or net loss

The final figure represents net profit, if positive, or net loss, if negative. Ensure your profit and loss statement includes all relevant income and expenses before finalizing.

The net profit formula is:

Net Profit = Operating Profit - Taxes - Depreciation - Interest

How to analyze a profit and loss statement

A well-prepared profit and loss statement provides valuable insights. Here’s what to focus on:

1. Sales trends

• Compare revenue across different periods
• Identify seasonal trends and external factors affecting sales
• Benchmark against industry averages

2. Cost of goods sold (COGS)

• Track COGS percentage over time
• Analyze supplier costs and potential savings

3. Operating expenses

• Identify cost-saving opportunities
• Compare marketing spend to revenue growth

4. Profit margins

• Gross Profit Margin = (Gross Profit / Revenue) * 100
• Operating Profit Margin = (Operating Income / Revenue) * 100
• Net Profit Margin = (Net Income / Revenue) * 100

Common mistakes to avoid when preparing a P&L statement

• Misclassifying expenses: This can distort your financial reports and affect tax deductions
• Ignoring tax deductions and depreciation: Overlooking these can result in overpaying taxes and misrepresenting net profit
• Failing to update financial records regularly: Inconsistent record-keeping can lead to errors in cash flow analysis and budgeting
• Overlooking seasonal revenue fluctuations: Not accounting for seasonal trends can result in poor financial planning and cash shortages

Ramp: Powering P&L management

P&L statements are one of the three critical financial documents you’ll regularly need to compile and report on. However, if you want continued long-term success, simply producing P&L statements won’t cut it. You must also instill a P&L responsibility ethos from the top down.

Ramp can help. It integrates with your accounting software, providing you with real-time visibility and control over expenses. Whether you want a high-level view or want to zoom in on a specific channel, Ramp lets you manage your spending habits better and forecast more effectively.

Use Ramp to take control of your financial future.