Profit and Loss Statement Businesses use the profit and loss statement as a valuable planning tool to estimate the expected monthly and yearly income as goals for controlling the business operation. In this final project we’ll walk you through step by step of what your template means, and how you can utilize each column so that your completed Profit and Loss Statement means something, as well as defines your first year in business! Understanding the form and its formulas

Make sure you’re not losing money just to run your business NET PROFIT (Gross Profit minus Total Operating Expenses and Taxes) GROSS PROFIT (Total Revenue minus Total Cost of Sales) REVENUE (amount customers paid you) Lemonade Stand Example How many cups of lemonade did you sell? Make sure you’re not losing money just to run your business Familiarize yourself with the Profit & Loss terms How much was the table, paper and tape? How much did this container cost? Revenue (Total Sales) Cost of Sales (Cost of Goods Sold) Gross Profit Operating Expenses (Overhead) Net Profit When viewing the profit and loss statement, there are some terms you should familiarize yourself with. To help us understand these concepts, let’s pretend we’ve opened up a lemonade stand in front of our house. Revenue (also known as Total Sales) is the total amount of money received for units of products or services sold. How many cups of lemonade did you sell? Cost of Sales (also known as Cost of Goods Sold) includes the expenses directly related to producing or buying your products and services. How much did it cost you to buy the ingredients? The appliances to make the lemonade? The cups and containers? Gross Profit is the Total Revenue minus the Total Cost of Sales. Operating Expenses (also called Overhead) includes necessary expenses that are NOT directly related to making or buying your product/services. Using the lemonade stand example, how much did the table on which to sell the lemonade cost? The sign? Net Profit is Gross Profit minus Total Operating Expenses. You always want to make sure that your revenue is greater than what you spend to run your business. If not, you’ll end up losing money just to run your business. OPERATING EXPENSES (amount you paid others) COST OF SALES (amount you paid others)

Now it’s time to look at your profit and loss statement template Now it’s time to look at your profit and loss statement template. As you can see, each month is represented as a column. Let’s use an example to help us understand what each row represents. Suppose you are a psychiatrist who just opened up an office with one nurse and one receptionist. REVENUE This is where you will put how much money you were paid by patients. So, you charge $200 per 1-hour session and you see 5 patients a day every week. For January, there are 20 work days so all together, $20,000 is your total sales for the month. Also, you also have a 2-hour speaking engagement each month at the local university. For each engagement, you are paid $300. As you can see in the row called “Total Revenue”, your total incoming sales for the month of January was $20,300. COST OF SALES This is where you will enter how much your company paid out to acquire any inventory that attributed to your revenue. In our example, as a psychiatrist, let’s assume that all you did was counsel your patients so, there would be no costs paid out. However, keep in mind for most businesses there will be. TOTAL GROSS PROFIT We now know that the total revenue is $20,300 for the patient visits and your university speaking engagement. And we also know that your business paid nothing for Cost of Goods. As a result, your Total Gross Profit is $20,300.   Let’s take a look at your EXPENSES. Expenses are categorized by type. Salary expenses are how much you paid your sales people, office staff, etc. As the owner, don’t forget to pay yourself! Payroll expenses is where you put the amount of money allocated for the payroll expenses such as taxes paid for unemployment, workman’s compensation, etc. We aren’t talking about the checks that payroll is written on. That would go in office supplies. This row is just the amount paid for taxes on the salaries to your employees. Even if you are a sole proprietorship, you will have some payroll expenses. As you go through each expense category, enter the amount you spent for the month. A good rule of thumb is to “round up” to the nearest dollar. Let’s say your telephone bill was $199.78. Round it up to an even $200. If you have a fixed expense, meaning it’s the same every month, enter it in advance for each month. In the Yearly column of this row, you can see how the template will add the entire year for you to give you a TOTAL of $12,000 spent on rent. NET PROFIT When your expenses are deducted from your gross profit here, you’ll see your Net Profit for the month of January is $6,100. PRIOR PERIODS Now let’s take a look at the columns after our yearly totals. Input your yearly totals from last year. This total will be calculated for you in Total Revenue (column P, cell 13). BUDGET This column refers to the amount that you “estimated” or budgeted. For your first year of business, it’s fine to input just an estimate because you have no prior amounts or figures to base the total on. VARIANCE calculates the difference in how much you expected to make or spend and how much you actually did. This column is calculated by subtracting what was budgeted for this row from Yearly. The most important thing to remember when using your statement for your business is that simplicity is best! Fortunately, there are many accounting programs out in the market today that will analyze and make your information more specific but regardless of what program you use, you must understand these basic concepts which are universal in all accounting practices and procedures today. Lastly, don’t forget to save your document and have fun with it!

To continue your lesson, click the Back button Presented by PMI Online Pima Medical Institute Online