When you apply for a small business loan, you’ll be asked to produce a number of documents. One that’s reviewed closely by lenders is your profit and loss statement (P&L).
A P&L statement is a financial report that shows a company’s revenues and expenses over a given period of time, usually a fiscal quarter or year. This report may have several different names: profit & loss, P&L, income statement or statement of revenues and expenses. In some cases, P&L can be called an operating statement. In almost all circumstances, profit is not the same thing as cash flow.
There are lots of good reasons to have an accurate P&L for your small business. One important reason to prepare a P&L statement is because it is required by the IRS. It’s the record of a business’ operation that is used to assess taxes on profits earned. A P&L is the only financial statement required by the IRS.
P&L statements help you project sales and expenses. Accountants and investors study a P&L statement carefully, scrutinizing cash flow and debt financing capabilities. According to Investopedia, along with the balance sheet and statement of cash flow, an income statement forms the backbone of basic accounting analysis.
Here are some details you need to know:
Revenues – expenses = net profit.
P&L statements generally follow this format:
– Operating (variable) expenses
= Gross profit (operating) margin
– Overhead (fixed expenses)
= Operating income
+/– Other income or expense (non-operating)
= Pre-tax income
– Income taxes
= Net income (after taxes)
These categories are defined as:
Revenue: Money you receive in payment for your products or services.
Operating, or variable, expenses: Expenses that rise or fall based on your sales volume.
Gross profit margin or operating margin: The amount left when you subtract operating expenses from revenues.
Overhead, or fixed, expenses: Costs that don’t vary much month-to-month and don’t rise or fall with the number of sales you make. Examples might include salaries of office staff, rent, or insurance.
Operating income: Income after deducting operating and overhead expense.
Other income or expenses (non-operating): Other income might include interest or dividends from company investments. Other expenses might include interest paid on loans.
Pre-tax income: Income before federal and state governments take their share.
Income taxes: How income tax is shown on the P&L varies based on the type of legal entity. A C corporation almost always shows income tax expense, but S corporations, partnerships, LLCs, and sole proprietorships rarely show income tax expense on the P&L.
Net income (after taxes): The final amount on most profit-and-loss statements. It represents the net total profit earned by the business during the period, above and beyond all related costs and expenses.