If you use accounting software like QuickBooks, Peachtree or the like, the program will generate a P&L statement for you after you enter your sales and expense figures, but you can easily create your own using a basic spreadsheet and easy calculations, following the steps below.
Step 1 – Track Your Revenue
Revenue is the money you have received in payment for your products and/or services. As you are paid, enter and keep track of the figures. This will be your total operating revenue.
Step 2 – Determine the Cost of Sales
These are not your day-to-day fixed expenses (like rent, salaries, etc.), but rather the expenses that vary depending on how much business you’re doing. You might also see this referred to as the cost of goods sold.
These variable costs might include inventory, raw manufacturing materials, and additional staff you hired to cover a busy period. (Regular salaries are fixed expenses and will be figured in later.)
Step 3 – Figure Out Your Gross Profit
Deduct the cost of sales (those variable operating expenses) from your total revenue to find out the gross profit of your operations for that particular time period.
Step 4 – Add Up Your Overhead
These are the fixed expenses you have to run the business. They don’t vary much from month to month or rise and fall with the number of sales you make. Examples include expenses like rent, staff, advertising, equipment leases, and phones. If you have costs you pay yearly, like insurance, divide them by twelve to get your monthly expense.
Step 5 – Calculate Your Operating Income
Deduct the cost of overhead from your gross profit. The result is your operating income.
Step 6 – Adjust for Other Income and/or Expenses
This would be money coming in or going out that isn’t related to the actual operation of the business. This type of income would include things such as interest or dividends from company investments, and expenses would be items like finance charges and interest paid on loans.
Add or subtract these from your operating income, and you are left with your total pre-tax income, or your net profit.
Step 7 – Net Profit: The Bottom Line
This is really the most important number of all, and the main reason for figuring out all the line items above. This number will show if you have a profit or loss after paying all your expenses.