A great idea and an endless drive do not make a startup successful, especially if you ignore the mundane accounting tasks. Profit and loss statement (P&L) should be among the first files you generate along with a budget and a costs worksheet. Let's recap why this statement is vital for startup survival and go over two quick and easy ways to generate the file. We'll provide a free template and recommend a popular web app to handle your finances.
What is P&L and Why Does Your Startup Need It?
Among the variety of accounting files, profit and loss statement is often overlooked despite its vital role. P&L report shows your business profitability over a period of time (month, quarter, year). The final line of the statement returns net earnings or losses after interest and taxes. Using this one line, you can evaluate how good or bad the business is faring. If the number is in the negative, your expenses exceed the revenue, and without quick intervention, you can go broke soon.
Startup P&L statement is not for your eyes only. It can help to secure funding for your small business from investors or to get a bank loan. If your net earnings are increasing over a few months, your chances of getting funded are good.
Another way to use the profit and loss statement is for planning and forecasting. Use your business plan to generate a predictive P&L report, adding the expected revenue and expenses to calculate the net earnings. If you don't like what you see, your business plan and strategy require more work. The same goes for comparing your forecast with reality after the first month. If the numbers do not fit your forecast, review your expenses to decrease them or look for new revenue streams to increase profits.
Free P&L Statement Template
To keep track of your business expenses and profits, create a spreadsheet with dates, revenue streams, and expense types as your column headers. Whenever you close a sale or transfer utility or Internet payment, add the number to the table, choosing the right date and column. At the end of the month, sum the numbers in columns and transfer them to a new list that will hold your monthly profit-and-loss statement.
As you can see from our template, the spreadsheet has several blocks:
Revenue streams indicate the sources of your business income;
Cost of goods or services sold shows the prime cost of your products;
Expenses are categorized and include all types of charges, from advertising to utilities;
Interest and taxes are deducted from your income to calculate the net earnings after taxes.
Using a free spreadsheet P&L statement template makes your bookkeeping quick and easy. Instead of calculating the losses and profits manually and dealing with a shoebox full of receipts, you can just input the data. The table processor will automatically calculate your gross profit, net earnings before and after interest and taxes.
Once you have accumulated enough monthly data, you can build charts and diagrams to help you visualize the progress of your business. If you are successful and keep the startup afloat for years, you will need an annual P&L statement. It looks the same, but instead of months, the columns represent years.
A simple spreadsheet P&L statement is easy to create and use. However, for it to be effective, you must remember to add relevant data daily, as soon as the payment occurs. For this reason, we recommend using a cloud-based spreadsheet processor, such as Google Sheets, that you can access from your smartphone or tablet.
Business Accounting Software
There are multiple web and mobile accounting apps capable of generating P&L statements for small and medium businesses, such as FreshBooks, QuickBooks, Xero, Zoho Books, and more. These solutions share similar features and pricing, and an ever-increasing competition on the market drives their rates down while improving functionality.
For example, FreshBooks is superior to an Excel P&L statement, as it:
Integrates with your business bank accounts and automatically processes data on sales and expenses, adding them to a P&L statement;
Stores and organizes cash transaction receipts for both profits and losses without the need to deal with a mound of papers;
Automatically calculates net earning before and after taxes, so you know exactly how profitable your startup is;
Visualizes the numbers in an easy-to-read format so you can assess the situation at a glance;
Provides multiple accounting features, including invoicing, time tracking, tax reporting and more, all invaluable for a startup.
Despite all the extra features and benefits, budgeting and accounting apps are rarely free. The prices start at around $10 per month and go up depending on the variety and number of features and subscription plan options. Adding the cost of a monthly plan to the budget might not be the best option if your startup does not have many clients yet. Instead, try to fill out the monthly spreadsheet P&L template to get a better understanding of the statement and keep a close eye on the expenses and profits. Once your small business is off the ground, you can graduate to an accounting app subscription plan or even develop a proprietary customized app to suit your business needs.
Let us know what you think about this quick overview of free and premium P&L statement software. If you want us to compare other business apps, leave a comment below and subscribe to FreshCode blog to get a fresh batch of IT insights in your Inbox.