If your business is registered with Companies house, you have to prepare a profit and loss statement as part of your statutory accounts. However, if you are not registered, you can choose whether to prepare a profit and loss statement or not. Although preparing a profit and loss statement can provide valuable insight into your business.
A profit and loss statement depicts the picture of the financial health of your business in the given time frame. A profit and loss in its simplest form is your income from sales minus all expenditures. If your income is more than total expenditure, it means your business is making profits and vice versa. This blog will give you in-depth insight on the benefits and how to prepare a profit and loss statement for your business.
You can also download a simple workable profit and loss statement template to calculate profit or loss of your business.
Benefits of preparing profit loss statement
The profit and loss statement of a business plays a vital role in making important business decisions.
The information in the profit and loss statement can give you valuable insight into your finances. It depicts different aspects of your cash flow. Cash flow is the net amount moving in and out of your business in a given period. A cash flow pattern of your business is an important determinant of the financial health of your business. Late payments from your customers are likely to cause cash flow problems. If the net amount moving out of your business is more than what’s coming in, you need to re-evaluate your cash flow strategies. A profit and loss statement can provide you a better understanding of your cash flow patterns while providing you with information on which customers you need to target to improve your cash flow.
Late payments can negatively affect your cash flow while making it difficult to forecast your financial health. With the information on which customers are paying late, you can take proactive measures, like taking upfront payment from such customers, offering discounts for early payments, or factoring late payments in your invoice to make an accurate financial forecast.
A better understanding of your profit and loss statement can help you make efficient business plans based on accurate information. You can determine the shortcoming of finances while identifying the potential pitfalls. These insights can help you decide where to apply for your funding and in determining which products or services are generating better revenues and which ones are a burden on the finances.
Having a clear image of your finances helps you make efficient decisions on funding plans, such as applying for loans and looking for investors. It also helps to determine where to use your funding. Acquiring funding and investing them at the right time and place increases your chances of success while giving you better control over your finances.
Running a business is not all about finances. It also comes with some financial obligations, such as meeting tax deadlines. Missing tax payments can end up in Tax penalties. So, it’s better to get your finances planned out to save your business from unnecessary financial burden. You can ensure that you have sufficient funds to meet your financial obligations by preparing an accurate forecast drafted through your profit and loss statement.
What to include in a profit and loss statement?
Cost of sale
It includes any cost incurred on production to sales of your product or services. E.g., cost on raw material, operational cost, marketing cost, etc.
Sale incomes
It includes the total income you receive on the sale of your product or service.
Overheads
It consists of secondary costs incurred to your business which includes:
- The payment you make to your employees for their services.
- Any fees or payments made to contractors, service providers, or contract workers.
- The cost incurred on communication, such as telephone and broadband bills.
- Any payment incurred on rent or any maintenance cost incurred on the business building.
- Insurance charges Legal and professional charges
- Banking charges Travel costs Tax payments including VAT, payroll, and self-assessment.
Utility bills How to calculate profit and loss?
There are two components of a profit and loss statement; gross profit or loss and net profit or loss.
Gross profit/loss is calculated by subtracting the cost of sale from sale income, while net profit/loss is calculated by subtracting overheads from obtained gross profit or loss.
