So, you’re running a small business. Maybe it’s a cozy bakery tucked on a busy corner, or maybe it’s an online design shop with customers spread across time zones. Either way, you’re juggling a lot ofclients, vendors, marketing, inventory, that one weird plumbing issue you’ve been ignoring. Somewhere in there, you know you should be keeping a close eye on your finances. Specifically, the profit and loss statement. The P&L. The thing your accountant keeps asking about.
But what is it, really? And why does it feel like financial gibberish wrapped in Excel cells?
Let’s walk through it, human to human.
First Things First: What’s a Profit and Loss Statement?
Here’s the plain truth: a profit and loss statement (often called an income statement) is just a summary of how much money your business is making or losing over a certain period of time. It lists all your income, subtracts all your expenses, and shows you the final result.
Think of it like a report card for your business, only instead of grades, you get numbers and instead of your mom’s fridge, it ends up in your accountant’s inbox.
You’ll usually prepare it monthly, quarterly, or annually. Some folks even do it weekly if they’re in fast-paced industries like food service or e-commerce.
Why Bother? Can’t I Just Check My Bank Account?
You could, but that’s like driving by only looking in the rearview mirror.
A bank balance tells you how much cash is sitting there now. A P&L tells you how that money got there, why it might not be there next month, and what you can do about it. It’s the difference between guessing and knowing.
It also comes in handy when:
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Applying for a loan or credit
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Attracting investors or partners
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Filing taxes (trust me, you’ll thank yourself later)
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Making real decisions like hiring someone or launching a new product
And hey, even if you’re not planning anything fancy, it’s oddly satisfying to see your hard work spelled out in numbers.
The Basic Formula (It’s Not That Scary)
Let’s break it down. A profit and loss statement usually follows this formula:
Revenue – Expenses = Net Profit (or Loss)
Simple enough, right?
Now, each of those three parts has some details, so let’s unpack them.
Let’s Talk Revenue: Where’s the Money Coming From?
Revenue (sometimes called sales or income) is every dollar your business brings in before you subtract anything.
If you run a cafe, it’s every latte, muffin, and sandwich sold. If you’re a freelance writer, it’s the total invoiced to clients. If you’re in retail, it’s your total sales. Yes, even before returns or shipping costs.
Some businesses also have what’s called other income from investments, affiliate links, rental income, or one-off gigs.
Pro tip: Always separate operating revenue (your main gig) from non-operating revenue (side stuff). It makes your numbers easier to read and your business easier to evaluate.
Now for the Expenses: Where’s the Money Going?
Here’s where things get a little more detailed but also more interesting. Your expenses tell the story of how your business runs day to day. These might include:
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Cost of Goods Sold (COGS): This is what you spend to make or deliver your product/service. Ingredients, packaging, materials, those all count.
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Operating Expenses: Think rent, utilities, software subscriptions, salaries, marketing, insurance. The usual suspects.
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Depreciation: If you’ve got big-ticket items like a company van or expensive equipment, you might spread their cost over several years.
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Miscellaneous Costs: Bank fees, office snacks, that emergency printer you had to grab on a Sunday night.
It helps to group expenses into categories so you can see trends like whether you’re spending too much on delivery fees or barely marketing at all.
So, you take your revenue, subtract all your expenses, and what’s left is your net profit.
If that number’s positive? Congrats! You’re profitable.
If it’s negative? Don’t panic. Many businesses operate at a loss, especially early on or during tough seasons. What matters is that you understand why.
Is your pricing too low? Are costs out of control? Are sales down? That’s what your P&L will help you figure out.
A Quick Example (Numbers Make It Real)
Let’s say you run a small coffee roasting business. Here’s a basic monthly P&L snapshot:
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Revenue:
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Coffee Sales: ₱150,000
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Merchandise: ₱20,000
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Total Revenue: ₱170,000
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Expenses:
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Coffee Beans (COGS): ₱40,000
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Packaging: ₱10,000
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Salaries: ₱50,000
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Rent: ₱20,000
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Utilities & Internet: ₱5,000
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Marketing: ₱5,000
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Subscriptions (POS, Accounting Software): ₱2,000
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Misc: ₱3,000
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Total Expenses: ₱135,000
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Net Profit: ₱170,000 – ₱135,000 = ₱35,000
Not bad, right? And now you’ve got a number you can actually use.
So… Should You Make One Yourself?
Short answer? Yes.
Longer answer? You can build your P&L using a spreadsheet if you’re comfortable with that. Google Sheets or Excel are both solid choices. There are even free templates floating around online. Just be sure to keep it updated regularly. Monthly is ideal. Quarterly at the very least.
But if spreadsheets make your eyes glaze over, or if your transactions are getting a bit… messy? It might be time for accounting software.
Tools That Make Life Easier
If you’d rather not spend your Sundays manually entering receipts, accounting software can be a game-changer. Here are a few small business favorites:
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QuickBooks: Probably the most well-known. Great for tracking everything in one place.
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Xero: A bit more modern-feeling, with a nice user interface.
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Wave: Free and surprisingly robust.
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FreshBooks: Especially good for service-based businesses or freelancers.
Most of these tools can generate P&L statements for you automatically. Just plug in your expenses, hook up your bank account, and voila. Instant clarity.
Real Talk: What Can Go Wrong?
Let’s be honest. Even with a clear P&L, things can get messy if you’re not careful.
Here are a few common slip-ups:
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Mixing personal and business finances. That ₱300 pizza receipt? It doesn’t belong in your P&L unless it was for a client lunch. Keep those bank accounts separate.
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Forgetting seasonal swings. A good month doesn’t mean every month will look the same. Look at trends across quarters or even years.
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Overlooking little expenses. That ₱600 Canva subscription, the domain renewal, even packaging tape. Over time, they all add up.
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Not reviewing it regularly. A P&L is only helpful if you use it. Letting it sit in a folder helps no one.
Using the P&L to Make Real Decisions
Here’s the beauty of it: once you’re comfortable reading your profit and loss statement, it stops being just a report. It becomes a map.
You can start asking better questions:
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“Can I afford to hire someone next quarter?”
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“Why are my expenses creeping up even though sales are steady?”
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“Is it time to raise my prices?”
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“Which product lines are actually the most profitable?”
And you don’t have to guess. The numbers are right there.
Making the Profit and Loss Statement Work for You
Sure, your accountant needs it. But more importantly, you need it. Whether you’re bootstrapping a one-person operation or managing a team of ten, your P&L helps you step out of the weeds and see the big picture.
You know what’s funny? A lot of small business owners say they “aren’t numbers people.” But once they get the hang of reviewing their P&L regularly, many start to enjoy it. It becomes this secret weapon. A confidence booster. Something that turns business from gut-feeling chaos into a strategy.
And hey, even if you are still a little spreadsheet-averse, that’s okay. You’ve got tools, advisors, even TikToks explaining this stuff now. What matters is that you don’t ignore it.
Get Started Today With CapForge’s Bookkeeping & Tax Services
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Partner with us today and discover the peace of mind that comes from knowing your financials are in good hands. Send an email to info@capforge.com or contact us at 1-858-633-3573 to get started. Additionally, you can fill out the form below and we’ll be happy to attend to your needs!