Building a business takes time, work, and accounting. Accounting? Yep, that’s right — accounting. If you really want to build a legitimate business that will allow you to get funding from banks and other lenders, you’re going to need to show that your business is viable. That can’t be just throwing a few numbers out there. It’s the way you actually organize those numbers that’s really going to make the most difference here. It’s one thing to assume that you don’t have anything to worry about, but the truth is that you really do need to think about the type of display your business has in the long run. If you do nothing but hope that someone will take your business seriously, you’re not going to get anywhere fast.
The best way to show outside lenders and investors that you have a viable business is through the profit and loss statement. Along with your business plan, this will actually help your business stand out from the crowd. The profit and loss statement doesn’t hide anything from anyone, which means that you will definitely want to only show it to interested parties. If you’re a private company, you don’t have to post your financials publicly anyway.
If you’re a bit worried about generating this document yourself, don’t worry — your accountant can do it for you. In addition, there’s also software out that can take your accounting books and generate a profit and loss statement automatically. There’s no need anymore to try to become an accounting major overnight with the sheer amount of information you would have to learn.
So let’s get into exactly what a profit and loss statement entails.
What you need to understand first is that profit and loss statements cover a certain period of time. That’s fixed — every P&L statement will have the exact time that it covers. Usually it’s a period of about a month, but it can vary — some businesses like doing it quarterly.
The general format of the P&L is that it’s essentially split in half. You’ll have the first half which is revenues and gains, followed by expenses and losses.
In the first half, you’re going to have revenue from primary activities, revenue from secondary activities, and gains. Gains would be like the gain on the sale of long-term assets, and gains on lawsuits if you’re unlucky enough to get involved in those.
Primary activities refer to the things that actively drive your business forward. By that token, secondary activities are the ones that happen passively in your business but still make you money.
Now then, let’s talk about the flip side here — expenses and losses. These would cover the expenses in primary activities, expenses from secondary activities, and losses. Losses are pretty self explanatory here.
Overall, there’s nothing keeping you from building a P&L statement if you really wanted to. Keeping good records beforehand will actually make this quite effortless. The only time it gets hard to define a P&L statement is when you haven’t been keeping good records and you have to go through sales receipts and expense sheets by hand. If you make your accountant do that, you can trust that your bill is going to be much higher than if you cut down on the research factor ahead of time.
The time is right to build a P&L statement — why not build yours today?