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Guide to Profit and Loss Statements for SMBs With Examples

profit and loss statement

Have you ever won a raffle? Found $50 on the street? If you have, odds are that you enjoyed the experience. The mind abhors a loss, but it absolutely loves a profit.

For business owners, calculating profit isn’t quite as easy as fishing a $50 bill out of the gutter. Running a business costs money—from marketing and material expenses to wages and investments in machinery. With cash constantly flowing into and out of your accounts, it’s tough to tell at a glance exactly how much money you’re making. 

The profit and loss statement is a financial report that quantifies a company’sprofits. By categorizing revenue and expenses over a period of time, this statement shows a company whether it has gained or lost money. This helps business owners identify trends, improve profits, and predict future changes in net income.

What is a profit and loss statement?

A profit and loss statement is a financial report that shows a company’s income and expenses over a period of time, such as a month, a quarter, or a fiscal year. The statement includes both revenue and expenses and calculates a business’s total profit or loss over the given reporting period. It is also sometimes referred to as an income statement, a statement of profit, or a statement of operations.

How does a profit and loss statement work?

Profit and loss statements sum up all of the money that a business has made (revenue) or lost (expenses) over a period of time. These statements include operating and non-operating revenue, operating expenses incurred, cost of goods sold (COGS), taxes, and non-operating expenses. Most businesses generate profit and loss statementsquarterly and annually, with some business owners also choosing to isolate shorter or longer periods of time. 

Operating revenue

Revenue is one of the main categories on a profit and loss statement, and it is divided into operating revenue and non-operating revenue. Operating revenue is the first number listed on a profit and loss statement, and it represents money that a business brought in during a reporting period by performing its core functions, such as selling vintage lunch boxes or performing custom paint jobs on bicycles. 

Cost of goods sold

Cost of goods sold refers to the direct costs associated with a business’s products or services, such as the materials and labor required to build a two-story doghouse. Service-based companies typically don’t report costs of goods sold, but instead report cost of revenue or cost of services. This could include the software licensing required to produce a consulting deck or the labor required to stage Macbeth. Although cost of goods sold represents an expense incurred, this amount is listed separately from expenses on a profit and loss statement. 

Gross profit

Gross profit, which is calculated using the formula gross profit = revenue - cost of goods sold, appears on the profit and loss statement after cost of goods sold. This number shows a company’s profitability before operating and non-operating expenses are accounted for, and it can help you identify if you are pricing your products appropriately. 

Operating expenses

The third major category on a profit and loss statement is expenses incurred. Expenses are divided into operating expenses and non-operating expenses, with operating expenses classified as the expenses required for a business to perform its day-to-day functions. This includes payroll and administrative expenses, the cost of office supplies, marketing and research costs, rents, and the cost of repairs to equipment. 

These expenses are listed on a profit and loss statement below cost of goods sold and are used to calculate net operating profit through the formulanet operating profit = gross profit - operating expenses.

Non-operating expenses and income

Non-operating income and expenses are listed beneath net operating profit on the profit and loss statement. Non-operating expenses are typically not recurring and are not directly related to core business functions. They might include investment losses or interest payments, lost asset write-offs, costs associated with business restructuring, or costs related to a disaster, like a flooded workspace or a malfunctioning walk-in freezer. 

Non-operating revenue represents income generated by something other than the performance of core business functions. It can include rental income, interest earned on investments, and money earned on the sale of company assets. 

Taxes

Profit and loss statements also include tax obligations. Your statement will include total profit or loss before taxes and tax obligations due during the reporting period.

Net income

The final number on a profit and loss statement, net income, represents the amount of money gained or lost during a reporting period. Net income is also referred to as the bottom line. The formula for calculating net income is revenue - cost of goods sold - operating expenses - non-operating expenses + non-operating revenue - tax obligations = net income. 

That’s a somewhat unwieldy formula, but profit and loss templates simplify things by following a consistent order and including the following intermediary sums: 

  • Gross profit = revenue - cost of goods sold
  • Operating profit = gross profit - operating expenses
  • Total income before taxes = operating profit - non-operating expenses + non-operating income

The final net income calculation, therefore, typically reads net income = total income before taxes - tax obligations. 

Each of these sums provides discrete information about your profitability before various additional expense categories are factored in. 

Profit and loss statement vs. cash flow statement

Like a profit and loss statement, a cash flow statement is concerned with the money that moves into and out of a business over a period of time.Cash flow statements, however, have a more limited scope, dealing only with transactions that affect a business’s cash balance. They also have different beginning and end points: while the profit and loss statement begins with revenue and ends with net income, the cash flow statement starts with net income and measures increases and decreases in cash to arrive at an ending cash balance. 

Profit and loss statement vs. balance sheet

The key to understanding the difference between a profit and loss statement and a balance sheet is time: while a profit and loss statement showsnet income over a period of time, a balance sheet is a snapshot of a company’s financial position at one specific moment. Your balance sheet measures current assets and liabilities, but it doesn’t tell you whether or not you’ve made or lost money this month, quarter, or year.

Example of profit and loss statement

Profit and loss statements follow a pattern, and a profit and loss template can make generating these statements easier. Here’s a sample quarterly statement, generated for a fictional business that carves presidential busts out of potatoes. 

Operating revenue

  • Sales

$43,000

Cost of goods sold

  • Materials

$67

  • Labor

$17,933

Total cost of goods sold = $17,000

Gross profit = revenue - cost of goods sold = $25,000

Operating Expenses

  • Shipping

$1,275

  • Offices supplies

$8

  • Marketing

$300

  • Loan interest

$250

Total operating expenses = $1,833

Operating profit = gross profit - operating expenses  = $23,167

Non-operating expenses

$0

Non-operating income

$0

Total income before taxes = operating profit - non-operating expenses + non-operating income = $23,167

Tax expense

$6,950

Net income = total income before taxes - tax expense = $16,217

 

Because this business brought in more cash as revenue than it spent on cost of goods sold and operating expenses, non-operating expenses, and taxes, it demonstrates a positive net income, or profit. Had its expenses exceeded its revenue, the profit and loss statement would show a negative net income, or loss.

Final thoughts

Whether you’re working toward profitability or planning a major acquisition, generating regular profit and loss statements can help you assess your business’s strengths and weaknesses and adjust accordingly. This positions you for future growth. 

By separating operating expenses, which you can expect to incur repeatedly, from non-operating expenses, which are not expected to recur, it can help you identify whether changes in financial performance are caused by terrible luck (a tornado tore through your orchid nursery) or a foundational problem with your business model (shipping your orchids costs more than you make on sales).


Maintaining this key financial report can help you monitor your progress and develop a business development strategy that maximizes your profits and moves you toward your business goals.

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