Creating a profit and loss statement is a legal requirement for incorporated companies and should provide the cornerstone of your financial record-keeping.
Used well, a profit and loss statement not only keeps track of your income and outgoings, but can provide an essential tool to help spot how the business is performing, where the weak spots are in terms of expenditure or income, which customers are best and which are worst, and how you might adjust your business strategy as a result.
Most small businesses keep a simple record of their income and outgoings on a spreadsheet, hand this to their accountant at the end of the tax year and the accountant turns it into a professionally formatted profit and loss statement which can be submitted to HMRC. However, for those start-ups and small businesses that don’t work with an accountant, we’ve provided a step-by-step guide to get you on your way.
There are certain calculations involved in profit and loss work that are more difficult than they first appear, so some professional help may well be necessary. But the more work you do, the less time it will take an accountant to finish off, which will keep your expenses to a minimum.
- Using a spreadsheet or your financial management software, create a top row for “total sales” if you are a trading business or “total income” if you are a service business.
- Each column should represent a different month, usually starting from the month your business incorporated or the start of your tax year.
- Create another row for “other business income” a couple of rows below. This can detail any income such as interest on business savings or investments, for example.
- This leads logically on to a third row titled “total turnover”, which is simply the first two rows (‘total income’/’total sales’ and ‘other business income’) added together.
- Then add a row titled “cost of goods bought for resale” – this is the cost of your stock or total of your expenses that month.
- And then comes a row titled “total cost of sales”, into which you can put the total of your expenses and stock purchases.
- Then create a “gross profit” row underneath. This should contain your total turnover/sales minus your total expenses/cost of sales to give a gross profit figure.
It is important to remember that “gross profit” is not the same as “net profit”. We will arrive at the net profit figure later on.
- Then create a series of other rows to detail your expenditure/expenses, each titled as a different category. These will vary from business to business but will generally include categories such as travel; wages, salaries and other staff costs; rent, utilities and insurance; phones, stationary and other office costs; advertising and marketing; bank, credit card and other financial charges; irrecoverable debts written off; accounting, legal and other professional fees; depreciation on business assets; and any other business expenses not covered above.
Adding everything up and then subtracting it from your gross profit/loss will give you your net profit/loss figure for the month/year.
Documenting expenses for business equipment is a little trickier and brings us to the issue of “depreciation”, which very few self-employed workers manage to calculate properly on their own.
When buying equipment such as furniture or a computer, it shouldn’t be recorded as an expense in just the year of purchase, as this has a disproportionate effect on the P&L of the business for that year. Depreciation allows the expense to be spread across the useful life of the equipment – in the case of a computer, for example, this might be three, four or five years. Therefore, if you spend £1,500 on a new computer, so-called “straight-line” depreciation dictates that £300 is deducted as an expense for that computer each year for five years, so the cost is spread out.
Professional help may be required on this point if nothing else, since different rules can apply for different items.
To see how online accounting software can help you track profit and loss, cash flow and your balance sheet, sign up for a free trial with QuickBooks.