How Do I Prepare a Startup Profit and Loss Statement?

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How Do I Prepare a Startup Profit and Loss Statement or Income Statement?

Even if you don't need money for your small business startup from a bank or other lender, you will need several financial statements to help you make some decisions. 

If you are using an online accounting system or other small business accounting software, this report should be included with the standard reports. Even if you have this report in your system, you should still know what information is required to prepare the report.

A profit and loss statement (sometimes called an income statement) shows the revenues and expenses, and resulting profits/losses of a business over a specific time period (a month, a quarter, or a year). Preparing an income statement at startup means you are estimating what your income will be at the end of the first year, so this statement is called a pro forma (projected) statement.

The preparation process and information needed is the same whether you are preparing a statement at startup or to use for tax preparation or business analysis. 

What information do I need to prepare this statement? 

Most of the information for this statement comes from your first-year monthly budget (cash flow statement), and from estimated calculations on depreciation from your tax advisor. Specifically, you will need:

  1. A transaction listing, of all the transactions in your business checking account and all the purchases made with your business credit cards.
  1. Include any petty cash transactions or other cash transactions for which you have receipts.  
  2. For income, you will need a listing of all sources of income - checks, credit card payments, etc. You should be able to find these on your bank statement. Don't forget cash paid to your business, for which you should have records. 
  1. You will also need information on any reductions to sale, like discounts or returns. 

Preparing an Income (Profit and Loss) Statement

For each row, you will have a quarterly amount then a total for the year.

  1. First, show your business net income (usually titled "Sales") for each quarter of the year. You can break down the income into sub-sections to show income from different sources  if you wish.
  2. Then, itemize your business expenses for each quarter. Show each expense as a percentage of Sales. All expenses should total to 100% of Sales.
  3. Then show the difference between Sales and Expenses as Earnings. This is sometimes called EBITDA (earnings before interest, taxes, depreciation, amortization).
  4. Then show total interest on your business debt for the year and subtract from EBITDA.
  5. Next list taxes on net income (usually estimated) and subtract.
  6. Finally, show total depreciation and amortization for the year and subtract.

The number you have now is net earnings, or your business profit - or loss. 

Preparing a Pro Forma (Projected Profit and Loss Statement

If you are starting a business, you don't yet have the information to prepare a real P&L statement, so you have to guess. A pro forma statement is usually prepared for each month of the first year in business.

 

1. List all possible expenses, over-estimating so you aren't surprised. Don't forget to add a category for "miscellaneous" and an amount.

2. Estimate sales for each month. Under-estimate sales, both in timing and amount. 

3. The difference between expenses and sales is usually negative for some period of time. The negative amounts should be accumulated to give you an idea of how much you will need to borrow to get your business started.