General information for small business owners, not tax or accounting advice. Your accountant or tax preparer can tell you how the rules apply to your business.
A profit and loss statement is a one-page summary of what your business sold, what it spent, and what was left over for a set period, such as a month, a quarter or a year. It answers the question every seller asks after a long season: did I actually make money?
You don’t need accounting software or a finance degree to put one together. If you know your sales, what your stock cost you and what your bills were, you can fill in the template below in an evening.
What a profit and loss statement shows
A profit and loss statement (often shortened to P&L) starts with the money that came in from sales and subtracts costs in a fixed order until it reaches the bottom line. Each step answers a different question:
- How much did customers actually pay you, after discounts and refunds?
- How much did the goods you sold cost you?
- How much did it cost to run the business, apart from the goods?
- What was left after everything?
It covers a period of time. That’s the main difference from a balance sheet, which is a snapshot of what the business owns and owes on a single day. A P&L for June tells you how June went. It says nothing about how much cash is in the bank on June 30. That’s a separate question, covered in our guide to cash flow for small businesses.
Income statement: same thing, different name
An income statement is the same report. Accountants and lenders tend to say “income statement,” owners tend to say “P&L,” and you’ll also see “statement of operations” or “earnings statement.” If a bank, landlord or grant program asks for an income statement, they want the report on this page.
The lines on a profit and loss statement
Most small business P&Ls follow the same order. Here is what each line means.
Gross sales and net sales
Gross sales is the total of everything you rang up. Take away discounts, refunds and returns and you get net sales, which is the revenue figure the rest of the statement is built on. Sales tax you collected is not your revenue; you hold it for the state and pay it over, so leave it out. Our gross vs net guide explains the difference in more detail.
Cost of goods sold (COGS)
What the items you sold cost you to buy or make: wholesale stock, ingredients, raw materials, and the packaging that goes out with the product. It only covers what you sold in the period, not everything you bought. The usual way to work it out is:
COGS = starting inventory + purchases − ending inventory
So if you started the month with $2,100 of stock at cost, bought $4,800 more, and counted $2,300 left at the end of the month, your cost of goods sold was $4,600.
Gross profit
Net sales minus COGS. This is what your products earn before any overhead. Divide it by net sales to get your gross margin, which tells you whether your prices leave enough room to run the business.
Operating expenses
Everything else it takes to keep the doors open: rent or booth fees, wages, card processing fees, insurance, fuel, supplies, phone and software, advertising, repairs. Group them into a handful of lines you’ll recognize. Ten lines you understand beat forty you don’t.
Operating income
Gross profit minus operating expenses. This is what the business earned from its day-to-day work, before interest, one-off items and income tax.
Other income and expenses
Items that aren’t part of normal selling, such as interest paid on an equipment loan, or a one-time gain from selling an old freezer.
Net income
The bottom line: what’s left after every cost. If it’s negative, it’s a net loss. We cover the formula, the variations and why it rarely matches your bank balance in what is net income.
A simple profit and loss statement template
Below is a fill-in template for a small shop, market stall or food truck. The first column is blank for your own numbers. The second shows a worked example: a coffee cart’s P&L for the month of June.
| Line | Your numbers | Example: coffee cart, June |
|---|---|---|
| Gross sales | $ | $14,200 |
| Less discounts and refunds | $ | −$400 |
| Net sales | $ | $13,800 |
| Cost of goods sold (beans, milk, cups, syrups, pastries) | $ | −$4,600 |
| Gross profit | $ | $9,200 |
| Rent, booth or commissary fees | $ | $900 |
| Wages | $ | $3,200 |
| Card processing fees | $ | $420 |
| Supplies (cleaning, napkins, lids) | $ | $380 |
| Fuel and vehicle | $ | $350 |
| Insurance | $ | $150 |
| Phone and software | $ | $120 |
| Marketing | $ | $100 |
| Repairs and maintenance | $ | $180 |
| Total operating expenses | $ | −$5,800 |
| Operating income | $ | $3,400 |
| Interest on equipment loan | $ | −$60 |
| Net income (before the owner’s income tax) | $ | $3,340 |
Reading the example: the cart kept about 67 cents of every sales dollar after paying for the coffee and cups ($9,200 of $13,800), and about 24 cents after everything else ($3,340 of $13,800). Those two percentages are worth tracking month to month. If the first one drops, look at prices and ingredient costs. If the second drops while the first holds steady, look at overhead.
How to fill in your P&L, step by step
- Pick the period. A calendar month is the easiest place to start. Use the same dates for every number.
- Pull your sales. From your point-of-sale reports, take gross sales, discounts and refunds for the period. Leave sales tax out.
- Work out COGS. Use the stock formula above. You need an inventory count, or an inventory valuation at cost, at the start and end of the period, plus your purchase invoices.
- List operating expenses. Go through your bank and card statements and sort each business payment into one of your expense lines. Leave out personal spending.
- Add interest and other items. Loan interest goes here. Loan principal repayments do not; they reduce what you owe rather than count as an expense.
- Do the subtraction. Net sales, minus COGS, minus operating expenses, minus other items. Check the math twice.
Cash basis or accrual basis?
There are two ways to decide which month a sale or bill belongs to. On a cash basis, you record income when the money arrives and expenses when you pay them. On an accrual basis, you record them when they’re earned or owed, even if money moves later. Many very small businesses use cash basis because it’s simpler, but the right choice depends on your business, so ask your accountant. Whichever you pick, stick with it so the months compare fairly.
Common mistakes on a small business P&L
- Counting sales tax as revenue. It inflates your sales and your profit, then disappears when you file.
- Using purchases instead of COGS. Buying $5,000 of holiday stock in October doesn’t mean October cost you $5,000 in goods. Only what sold counts.
- Booking a big equipment purchase as a one-month expense. A new espresso machine or trailer is usually spread over several years. Your accountant will know how to handle it.
- Treating owner draws as an expense. Money you take out for yourself as an owner is generally not a business expense on the P&L. Wages paid to employees are.
- Mixing personal and business spending. A separate business account makes step four far easier.
What to do with it once it’s done
One P&L is a number. A row of them is a story. Line up the last few months side by side and look at what moved. A big sales month that barely improved net income is a common surprise; our piece on revenue vs profit walks through why that happens. And remember that a profitable month can still leave you short of cash, especially before a busy season.
Where SleepingFire fits
SleepingFire is point-of-sale and inventory software, not accounting software, so it doesn’t produce a P&L for you. What it does is supply the numbers at the top of one. Filter the reports to any date range for gross sales, discounts, refunds and your sales tax summary, check profit margin per product, and export inventory valuation at cost to work out cost of goods sold. See the sales reports.