Profit and loss statements and balance sheets

In its most basic form, the P&L statement shows the profitability of the business for a set time period. The time period can be for the year, quarter, month, or even a day – whatever you need to understand. Profit is how much you are making from the business; loss is how much you are losing on the business. You calculate the profit or loss by taking all the revenue (how much you took into the business in that period) and subtracting the expenses. The result is either a profit (how much you made) or a loss (how much your expenses exceeded your revenue). 

For example, Luz had revenue of $55,000 for Quarter 2. In the same quarter, she had $47,000 in expenses. As a result, she has a profit of $8,000 ($55,000-$47,000 = $8,000). 

It can be most helpful to not only look at the P&L for one period but to have a similar period to compare it to. For example, if you look at the monthly P&L for February you might also compare it to January to see if you are getting more or less profitable. In addition, the P&L statement can show you more than just profit. Since it is broken up by category of revenue and expenses you can often get a sense of where changes in expenses or revenues are affecting your business. 

Let’s look at a more detailed example from Luz’s child care business. Here is her P&L for Quarters 1 and 2: 

By comparing the two quarters, Luz can learn some interesting things about her business. Her revenue stayed the same from Quarter 1 to 2. However, her expenses went up by 12% resulting in a profit that was 38% lower. Looking at the expenses, Luz found that her Rent and Utilities doubled. She had no explanation as to why. Once she investigated, she found that a broken pipe was leaking and running up her water costs.

Where the P&L was showing the performance of the business over a period of time (such as a year, quarter, or month), the balance sheet just focuses on the state of your business on a given date. 

The balance sheet has three components: 

• Assets: Cash, accounts receivable (the money that is owed to you)
• Liabilities: Overhead, debt, accounts payable (the money that you owe others)
• Owner’s equity: Total assets minus liabilities (your net value) 

The balance sheet lets you know how healthy your business is since it shows you a picture of revenue, debt, and how much money you are taking out of the business. 

The balance sheet gets its name from being “in balance;” specifically the total assets should equal your liabilities plus the owner’s equity. 

Let’s look at Luz’s balance sheet for last week: 

In this case, Luz has a good amount of assets including cash in her bank account and funds receivable. She owes some money on her credit card and has a business loan, but even with those debts she would still have $7,000 left over in earnings (that is, assets of $14,500 – liabilities of $7,500 = $7,000) 

Both! The P&L, balance sheet, and your cash flow statement provide a holistic view of your business’s health. Remember, the data is only as good as what you enter into your accounting system, so it’s worth ensuring you have a good record-keeping system.

Disclaimer

The information contained here is for educational purposes only and is not intended to constitute legal, tax, or financial advice.