As a small business owner or sole trader, you may find accounting overwhelming and tedious. But understanding the basics of accounting is essential to helping you make financial decisions that keep your business running successfully.

The main financial statements you need to concern yourself with are balance sheets, cash flow statements, and profit and loss statements (or P&L). 

This guide will answer the question ‘what is a profit and loss statement for self-employed’ by covering the following topics:

  • What is a profit and loss statement, and how does it work?
  • Why do you need one?
  • When you need to prepare a P&L
  • What you need to include in your P&L
  • How to create a P&L

What is a profit and loss statement?

The profit and loss statement is also referred to as an income statement. This statement measures your business revenue (income from sales) and expenses over a specific time, usually monthly, quarterly or annually.

Put simply, a profit and loss statement shows you if your business is making money. 

Why do I need a profit and loss statement?

You can use your profit and loss statement to measure business performance and identify where there is room for improvement. Understanding your profits and losses can help you come up with new strategies to help grow your business.

A profit and loss statement can also help you make informed decisions regarding aspects like:

  • Can you afford to hire any new employees?
  • Do you have enough money to purchase a new company vehicle?
  • How to plan your taxes
  • How effective your current business strategy is

Additionally, investors will look at these statements to see how profitable your business is over time. They use the information to judge your operational efficiency and how effective your business model is.

Lenders will also look at your P&L to determine whether your business is likely to make a big enough profit in the future to pay back business loans and interest payments.

When do I need to prepare a profit and loss statement?

There are two types of profit and loss statements you’ll need to prepare for your business.

Periodic profit & loss statements

Every business must prepare and review profits and losses regularly, at least once per quarter. Doing so allows you to make informed decisions to support business growth. Reviewing your profit and loss statement also helps you prepare your business tax return. The information on the P&L shows your net income to determine your Income Tax bracket.

Pro forma profit & loss statements

New businesses also need to create a profit and loss statement at startup, called ‘pro forma’. This statement is a projection into the future, meaning you have to estimate how you think your business will perform the next month. 

A new business usually fills in a pro forma statement every month for the first year. You also need a pro forma statement when applying for financial backup to fund new business projects.

Information included in the profit and loss statement

Profit and loss statements must include the following information:

  1. A list of all transactions in your business current account plus all the purchases you made with any credit cards. 
  2. Any payments you made with your petty cash, along with receipts from the transactions.
  3. A list of every source of income you have, such as cash or card payments or invoices. You should be able to find these on your bank statement.
  4. Information about any products or services you sold at a discounted rate, including the discounted price.
  5. All cash transactions made, both income and expenses. Save your receipts, especially for any business journeys or meal expenses.

The 2-in-1 business account and accounting app, Countingup automatically generates a running P&L report so that you can keep on top of your finances on the go. 

How to create a profit and loss statement

Using an app like Countingup will automatically create a live P&L report for your business. If you would like to create your own statements manually, here’s how to go about it:

Pro forma profit & loss statement

When creating a pro forma statement before starting your business, you need to follow the steps below:

  1. List all expenses you expect to have, including bills, taxes, debts and so on. Include a “miscellaneous” category to add items that don’t fit in the other categories. It’s a good idea to overestimate the amounts, so you’re not surprised by unexpected costs. 
  2. Estimate how many products or services you’ll sell each month. Here it’s best to underestimate both in timing (when you make the sales) and the amount.
  3. Your expenses will likely exceed your sales for some time, meaning you’ll make a loss in the beginning. You should also add up your loss amounts to get an idea of how much you will need to borrow to get your business started. 

Periodic statement

When preparing a periodic profit and loss statement, you need the same information as for pro forma. However, your previous income statements will have the information you need for the P&L. 

Start by picking a time frame for assessing your P&L statements (monthly or quarterly), then follow the steps below to create your statement:

  1. List your business revenue (money you made from sales) for the time frame and break down the total amounts by month, unless you complete your statements on a monthly basis. Be sure to include your other sources of income as well, like investments or selling off assets.
  2. Calculate your expenses, separating operational expenses (money you spend to run your daily operations) from COGS (direct costs of producing the goods or services you sell).
  3. Also, determine your gross profit by deducting your COGS from your revenue.
  4. Finally, you want to figure out if you’re making money by deducting your total expenses from your gross profit. If you get a positive number, you’re right on track. If the number is negative, it means you’re at a loss. 

Your profit and loss statements help you identify what your company does right and the biggest problems that hold you back. This information will help you create a business plan that will support growth and place you on the path to success.

Get the profit and loss insights you need with Countingup

With Countingup, you get a business current account and accounting software in one app that streamlines your financial management. The simple app gives you real-time profit and loss reports, cash flow insights, automatic invoices, and more.

Download the Countingup app to apply for your business current account in minutes. All you need is proof of ID and a selfie. Download the app here.