What Is a Profit and Loss Template? (With Types and Example)
By Indeed Editorial Team
Published October 18, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Successful companies must understand and stay updated on their financial position. A profit and loss statement is one document essential to achieving this. Understanding how to use a profit and loss template can help you design an effective one for small businesses and organizations and help them understand their financial position. In this article, we discuss what this template is, identify the importance of a profit and loss statement, highlight the various types, outline how to make them, and provide an example template as a guide.
What is a profit and loss template?
A profit and loss template is a guide that includes all the typical sections of a profit and loss (P&L) statement, and you can use it to create a company's profit and loss statement. This statement is one of the three most important financial statements for a company, the other two being the cash flow statement and the balance sheet. A company's profit and loss or income statement show its revenue, business costs, and expenses over a specific period. For example, businesses can calculate P&L over a month, quarter, or year.
The P&L statement of a company shows its financial state over a period. Companies can compare P&L statements to previous ones and track changes. Through this, a business can detect issues that aren't obvious from just one statement. For example, a company's revenue may increase every year, but a look at previous statements shows the expenses increase faster, and the business may experience loss soon. Together with the balance sheet and cash flow statement, the P&L statement gives a comprehensive view of a company's financial health. Other names for the P&L statement include:
statement of profit and loss
statement of financial results or income
statement of operations
Importance of a profit and loss statement
Here are some of the reasons a profit and loss statement is important for companies:
Identifies the causes of loss for a business
The profit and loss statement breaks down all parts of a company's revenues, costs, expenses, and final income. This makes it easy for concerned stakeholders to determine the exact cause of loss in a business. For example, by observing the profit & loss statement, a manager can determine which expense impacted the revenue most. The P&L statement reveals which costs are within the company's control and which aren't. For example, while a business can work to reduce operational costs, it can't reduce taxes. This benefit is important for deciding if a business is unprofitable.
Shows the popularity of a business' products
The first element of the profit and loss statement shows the total revenue a business generated within a specific period. Experts also refer to this part of the P&L statement as the top line. Unlike income, a company's revenue shows how much it made from selling its products or services alone. As such, it's an excellent way to determine the popularity of a company's products. This is important because a company can run at a loss but still have popular products. Knowing the difference can help companies decide how to optimize other business processes to become profitable.
Informs business strategy
The profit and loss statement is a simple and effective way of demonstrating an organization's financial health. It breaks down the finances into various elements that make it easy for company executives to track where the money goes in and out of business. With this information, executives can make informed long-term decisions about how to make the company profitable. For example, if the P&L statement reveals that the business' profits are significantly affected by taxation, executives can consider relocation or business process outsourcing. Similarly, executives can resolve high operational expenses by improving technology or sourcing cheaper resources.
Provides information for investors and shareholders
The profit and loss statement is one of the three major financial statements that experts use to determine an organization's overall financial health. When combined with the cash flow statement and balance sheet, investors can use the P&L statement to determine if a company is profitable or likely to become profitable. For example, by comparing the shareholder equity from the balance sheet with the net income from the P&L statement, an investor can determine the company's return on equity (ROE). Essentially, the P&L statement is important for experts to make informed decisions about investing their client's money.
Reveals an organization's needs
As it provides a comprehensive view of an organization's financial health, the profit and loss statement is essential for showing its needs. For example, if the profit and loss statement reveals that operational expenses are higher than usual, it can help the company realize that it's time to invest in better technology. Similarly, organizations can track their previous expenses to determine their effectiveness. For example, if a company increased spending on technology but still recorded higher operational expenses, it highlights the need for a different approach.
Types of profit and loss statements
There are two major ways businesses prepare their profit and loss statements. They include:
1. Cash method
This method is popular with smaller businesses or people calculating their finances because it's a simple model. Although, the cash accounting approach only records cash that goes in and out of business. Under this method, the business receives cash first before it records it as revenue. Similarly, only cash that has left the business qualifies as a liability. It doesn't include cash the business hopes to pay or receive in the future.
2. Accrual method
This method is common with large corporations with a lot of accounts receivable and accounts payable. Under the accrual method, businesses record cash that they hope to receive or pay in the future. For example, if a manufacturing company receives a shipment of resources for $10,000, which is due for payment in 30 days, that amount is a liability under the accrual method. Similarly, if the manufacturing company delivers $200,000 worth of products for which it expects payment in three months, its accountant can enter that amount as revenue.
How to make a profit and loss statement
Here are some steps you can follow to make a profit and loss statement:
1. Determine the period
You can calculate your profit and loss statement on a monthly, quarterly, or annual basis. The appropriate time frame depends on your reason for calculating your profit and loss. Although, many large organizations calculate it annually, as that offers the most comprehensive view of the organization's finances.
2. Calculate revenue
The first element of the profit and loss statement is the company's revenue. You can obtain this figure from your accounting documents like the general ledger. Ensure you record all the revenue the business has earned over the specific period, whether it has received the cash if you choose the accrual method. Also, include all revenue streams for an accurate representation of the business' profit and loss.
3. Calculate the cost of goods sold
This refers to the amount it took you to get the goods you sold. For a retailer, this simply refers to the cost of inventory. For a manufacturer, this includes the cost of the raw material, factory equipment, and electricity used to manufacture the products. Businesses that provide services can include the cost of consultation time or the time employees spend providing the service.
4. Determine the gross profit
To find the gross profit, simply subtract the company's total revenue from the cost of goods the company sold. This shows you the amount of profit the business made from selling its products. The gross profit doesn't represent the final earnings of the business.
5. Calculate the company's operating expenses
Operating expenses are costs that are necessary for the business to maintain its functions. They include rent, utilities, office supplies, telecommunication, travel, postage, and office lunch. Compile all these expenses and add them up to find your total operating expenses.
6. Determine the company's operating profit
To determine the company's operating profit, subtract your total operating expenses from your gross profit. A positive number implies the company is in profit, while a negative implies a loss. The company's operating profit is also not its final earnings.
7. Include any additional income
This is the section where companies can include any earnings that aren't part of their revenue streams. This can include investment returns or interest on loans. Then, add this to the operating profit to determine the company's earnings before interest, taxes, depreciation, and amortization or EBITDA.
8. Calculate your net profit
The first step to finding your net profit is to calculate the total of your interests due, taxes, depreciation, and amortization. Next, subtract this amount from your EBITDA, which is the sum of your operating expenses and any additional income. The result is your net profit or income.
Template of a profit and loss statement
Here is a simple template of a profit and loss statement that you can follow:
12 Months (Jan 1–Dec 31)
Sales and revenues
Sales of clothing, shoes, and bags:
Revenues from the website and mobile application:
Production costs of goods:
Marketing and advertisements:
Salaries and employment benefits:
Cost of maintaining website and application:
Product research and development expenses:
Other operational expenses:
Depreciation and amortization:
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