How to Prepare a Profit and Loss (P&L) Statement for Your Startup
Last Updated: By Michaela Dale
Monitoring your startup’s finances is an integral part of knowing how to sustain and grow your business. A profit and loss (P&L) statement is one key element to measuring the health of your startup’s finances.
This guide walks you through what a P&L statement is, why your company needs it, and how to prepare a profit and loss statement for your startup.
P&L Statements for Startups
Tracking a company’s profit and loss provides entrepreneurs with insight into their startup’s financial wellness and performance over a period of time, allowing them to make better decisions for their business.
While it is possible to prepare a P&L statement using financial management software such as QuickBooks, knowing how to manually issue one can be valuable for entrepreneurs. Especially if they are looking to deeply familiarize themselves with their company’s financial position.
What Is a Profit and Loss statement?
A profit and loss (P&L) statement, commonly referred to as an income statement, is a summary of the net profit and loss of a company over a period of time. This is one of three financial reports businesses are required to prepare annually and quarterly, along with a cash flow statement and balance sheet.
The P&L statement, specifically, indicates whether a business is profitable or not, how much profit is being made, and helps when filing taxes.
Why Do I Need a P&L Statement for My Startup?
As mentioned above, P&L statements are one of the three reports businesses are required to issue. However, these statements also provide value for entrepreneurs and their teams to better their company’s financial position.
Tax Preparation
Not only is a P&L used by startup founders to gauge the financial performance of their company, but the Internal Revenue Service (IRS) uses these statements to make tax assessments as well.
Generates Feedback
The amount of profit versus expenses may help you better understand how your product or service is performing. This feedback may help you troubleshoot and adapt to better reach your target market.
How to Create a P&L statement
Many businesses choose to use software to track their finances that can easily issue a profit and loss statement. However, if you’d rather prepare one manually, here are six easy steps to create a P&L statement for your startup.
1. Choose Your Time Period
Whether you’re issuing an annual, quarterly, or monthly P&L sheet, your first step is to determine the reporting period you’re calculating for. Then, gather all of the information required to calculate revenue, expenses, and any other financial information from that period to create your statement.
2. Calculate Revenue
Next, calculate your company’s revenue for your reporting period. This will include any money you gain from the sale of your company’s profits or services.
It is helpful to keep these sales documented and organized as they occur.
3. Calculate Expenses
After you have determined the amount of money you have coming in, you need to calculate the money your company is spending, otherwise known as expenses or costs of goods sold.
This, however, does not include salaries, leases, or any other fixed expenses.
4. Find the Gross Profit
Your next step is to determine your gross profit by subtracting your operating expenses (Step 2) from your revenue (Step 3) listed above.
5. Add In Overhead Costs
Then, add your overhead costs. These are the fixed expenses that typically don’t change based on your revenue, such as salaries, rent, insurance, and other continuous expenses.
Subtract the total of your overhead costs from your gross profits to determine your operating income.
Keep in mind that if you have any non-operational expenses or revenue, such as interest or dividends, these will need to be added or subtracted from your operating income.
6. Assess the Net Profit
Once you have your operating income, you will know your net profit. This is how much profit or loss your company had over the reporting period after revenue and expenses.
You can use this number to assess the financial health of your company and make changes if needed to avoid losses in the future.
P&L Statement Tools for Startups
While it is possible to issue profit and loss statements manually, using financial management or accounting software makes the process easier and faster. Here are some great options for startup profit and loss statement tools.
1. QuickBooks
With QuickBooks’ suite of accounting software tools, startups can easily manage their finances as well as prepare profit and loss statements with ease.
2. Lili
If you’re looking for a free P&L template as well as additional resources, Lili offers a variety of information. Plus, if you utilize Lili’s accounting software, profit and loss statements are automatically generated for you.
3. FreshBooks
Finally, FreshBooks offers a free downloadable P&L template that is compatible with Google Sheets, Google Docs, PDFs, and more.
