Every business should know how to manage its finances properly which can help make better decisions. It is advisable for small businesses including startups to prepare an income statement for evaluating the profit and losses in detail. The profit and loss statement allows a business to get ideas on how to increase revenues and reduce unwanted costs which give ways to accomplish goals. Another thing is that it provides methods to evaluate the financial progress during a time period with high accuracy.
Here are some tips small businesses should consider while preparing a statement.
1. Revenue
Revenue is the most important factor to reflect in the statement. It should include total sales, gross receipts, tax refunds, or any other terms which describe the operating revenues of a company. A small business should prepare the business’s revenue for each quarter of the year when creating a statement. It is advisable to adjust the gross sales in order to increase the accuracy of reported income.
2. Expenses
The profit and loss statement of a small business should include the expenses and list them under different categories. Some of them include advertising costs, interest expenses, office supplies, employee salaries, payroll taxes, employee benefits, payments to contractors or vendors, professional fees for accountants, and payments for attorneys. Businesses shouldn’t include interest on business debt when creating a statement.
3. Cost of goods sold
A business should figure out the cost of goods sold (COGS) in a statement. It is imperative to include the cost of materials and the time taken to produce them. After that, small businesses should subtract COGS from the sales which will determine the actual revenue.
4. Gross profit
Gross profit is another important factor to consider in profit and loss statement preparation that allows a business to plan other things in advance. A business should subtract COGS from gross revenue.
5. Net income
Income, or profit, is the most important thing to reflect in a small business’s profit and loss statements that can help to move further. A small business can calculate the same by subtracting all expenses from total revenue.
6. Depreciation
A small business should list the depreciation and amortization while preparing a statement. It should subtract the same from the balance left after listing taxes on income. Moreover, small businesses should look out for examples from different sources that can help create a statement with ease.
