If you run a business, whether it’s just you or a full team, the question often comes up: Do I really need a Profit & Loss (P&L) statement?
The short answer is: Yes. Let’s break down why this financial tool is essential and how it can help you build a more profitable and sustainable business.
What Is a Profit & Loss Statement?
A Profit & Loss statement (also called an Income Statement) is a financial report that summarizes your business’s performance over a specific time period. It includes:
- Revenue: The money your business earns from sales or services
- Cost of Goods Sold (COGS): Direct costs related to producing your products or services
- Operating Expenses: Rent, payroll, marketing, software, and other overhead costs
- Net Profit (or Loss): What’s left after subtracting all expenses from your revenue
If you want a more in-depth explanation, check out Investopedia’s Guide to Income Statements.
Why You Need a P&L
Here are four key reasons you shouldn’t skip creating a Profit & Loss statement:
- It Gives You Financial Clarity
Without a P&L, you’re essentially running your business without a dashboard. You may see money coming in, but you won’t have a clear picture of what you’re actually keeping. - It Supports Smart Decisions
Before making big moves such as hiring, expanding, or increasing your marketing budget you need data to back up your decision. A P&L tells you whether you can afford it. - It’s Required for Loans or Investors
Banks and investors want to see your P&L. It gives them a quick overview of your financial health and whether your business is profitable. - It Simplifies Tax Season
Having your income and expenses clearly documented makes filing taxes faster, easier, and more accurate. It also helps you catch deductible expenses you might otherwise miss.
What’s Included in a Profit & Loss?
| Section | Includes |
|---|---|
| Revenue | Product or service income |
| Cost of Goods Sold | Materials, labor, and direct costs |
| Gross Profit | Revenue minus COGS |
| Operating Expenses | Rent, utilities, salaries, marketing, software, etc. |
| Operating Profit | Gross profit minus operating expenses |
| Other Income/Costs | Interest income, asset gains/losses |
| Net Profit or Loss | Your final number after all income and expenses |
How to Create One
You don’t need an accounting degree to create a basic Profit & Loss statement. Here’s how to get started:
- Collect Financial Records
Get your bank statements, receipts, invoices, and payroll records ready. - Record All Income
Add up all the money your business has made during the period you’re reviewing. - List Costs of Goods Sold
Include any costs directly related to your products or services. - Log All Operating Expenses
Track everything you’ve spent to keep the business running marketing, rent, software subscriptions, and more. - Calculate Totals
Subtract your costs and expenses from your income. What’s left is your profit (or loss).
Need more help? Follow QuickBooks’ step-by-step guide on preparing an income statement.
How Often Should You Review It?
- Monthly: Best for most small businesses to stay on top of trends and catch problems early.
- Quarterly: Works well for businesses with less frequent transactions.
- Annually: Required for tax filing and long-term planning.
Common Mistakes to Avoid
- Mixing Personal and Business Finances
Always use separate bank accounts and credit cards for your business. - Forgetting Smaller Expenses
Keep track of every recurring or one-time expense, even the small ones. They add up quickly. - Ignoring Depreciation and Non-Cash Costs
These don’t affect your bank balance directly, but they matter for your true profitability.
Final Thoughts
A Profit & Loss statement is more than just a formality. It gives you the power to:
- Understand where your money is going
- Spot trends and improve profitability
- Make informed business decisions
- Share your progress with lenders, investors, or partners
It’s not something to put off until tax season. Start today and build the habit of checking your P&L regularly.
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