Understanding Business Profit and Loss

For most home business owners and many small business operators, their idea of a profit and loss statement, P&L in business parlance, may be oversimplified. If they had more income than expenses, they made a profit. If not, they had a loss and will usually try to find more business or increase prices to turn the trend around. By better understanding their own business’s profit and loss statement, they will be able to determine not only how much money is earned and spent, but also track their expenses to gain better control of the finances.

The first thing to remember is that there is a difference between a budget and a profit and loss statement. Income is projected and expenses are budgeted, based on the income projection. If the income does not meet the forecast, certain expenses will need to reigned in to make the profit and loss statement come in on the plus side at the end of the month.

The business’s P&L can be as simple or as complex as you choose to make it, but the more tracking of expenses that you do, the better handle you can have on what needs to be done to control your profit amount. For example, you can simple include a line in your expense column pertaining to utilities and lump them all together. However, to get a better picture of where your money is going, you will want to break them down into subcategories such as electric, gas, water and telephone.

By keeping them separate you may see a need to bring telephone costs under control by eliminating unnecessary lines that seldom ring or find ways to save on your electric costs. If you deduct for business use of your home, you will have a pretty good idea of what your costs for utilities, rent, insurance and other expenses will be based on the percentage of your home’s cost deducted for business use of the home.

One of the first things to budget, which has the greatest impact on your P&L will be income. Whether you sell a product or service, you will need to track all forms of income, as well as allow for deductions due to refunds and rebates and any discounts offered as customer incentives. Tracking this on the P&L is fairly easy, as if the money comes into the business it is considered income. The source can be itemized as well to help indicate how you may go about increasing income.

Expenses in the budget can be calculated as a fixed dollar amount or a percentage of income, which usually provides greater control over spending. Itemized expenses on the P&: can also make filing income taxes easier as you will have a monthly record of how much money came into the business as well as where every dollar went that left the building.