Key Takeaways
- A profit and loss statement shows your revenue, expenses, and resulting profit or loss for a set period of time.
- It helps you understand how your business turns sales into profit—not just whether money is coming in.
- A basic P&L follows a simple flow: revenue → expenses → profit.
- You can build a P&L using spreadsheets or accounting software, as long as the underlying data is accurate.
Your bank balance tells you how much cash you have in your DMV business today.
But it’s a terrible storyteller.
It can’t tell you if your pricing is sustainable or which products are actually profitable. Or more importantly, where your hard-earned revenue is leaking away.
For that, you need the most powerful narrative in business: the profit and loss statement.
Why do I need a profit and loss statement?
At its core, a profit and loss statement shows whether your business made money or lost money over a specific period of time.
But a good P&L also helps you understand why the numbers look the way they do and what they mean for your next decisions.
Making a profit and loss statement can help you:
- See whether your business earns enough to cover its costs and operating expenses
- Determine whether you can afford to pay yourself as the owner
- Evaluate whether your current business model is financially sustainable
- Identify your largest spending categories and where cost adjustments may be possible
- Spot lower-performing revenue streams that may need pricing or structural changes
- Highlight your top-earning products or services so you can focus on what’s working
- Track growth over time and recognize sales or margin trends
Because the P&L summarizes revenue and expenses over a defined period (monthly, quarterly, or annually), it also gives outside parties a clear snapshot of performance. Lenders and investors often review it alongside the balance sheet and cash flow statement to assess profitability and overall financial health.
What should go on my profit and loss statement?
You start with revenue. From there, you subtract the cost of goods sold (COGS), including:
- Inventory purchases
- Shipping
- Manufacturing costs
- Labor
- Materials
- Transportation
Or any other costs directly tied to delivering the product or service.
Revenue — COGS = gross profit.
Next come your overhead or operating expenses. That includes things like:
- Rent
- Utilities
- Software
- Phone
- Insurance
- Office supplies
- General administrative costs
These expenses keep your business running but aren’t tied to a specific sale.
Once those are subtracted from gross profit, you arrive at net profit. This is the bottom line of what your Washington business earned (or lost) after covering its costs.
Making a profit and loss statement
There are two approaches you can take here.
Some businesses use a single-step P&L, where total revenue – total expenses = net income. A single-step P&L is great if your business is smaller and your operations are pretty straightforward.
Or, you could use a multi-step P&L. It separates operating income from non-operating income and expenses before arriving at pre-tax income and net income. You might benefit from a multi-step P&L if your business is growing, and you need more detailed financial insights.
Note: You don’t need expensive software to create a basic P&L.
Excel and Google Sheets both offer templates. Many accounting platforms, like QuickBooks or Microsoft 365, generate P&Ls automatically once transactions are categorized correctly.
Now, onto making a profit and loss statement…
Step 1: Pick a timeframe. Most small businesses prepare P&Ls monthly, quarterly, or annually. Monthly reports give you timely insight, while quarterly and annual views help show trends. You want enough data to be useful, but not too much that it just becomes noise.
Step 2: List your revenue. At the top of the statement, record your income for the period. If possible, break it out by month or income source. Adjust for discounts, refunds, and returns. Also note whether your business uses accrual accounting (recording sales when they’re earned) or cash accounting (recording sales when payment is received).
Step 3: Calculate your expenses. Separate direct costs from operating expenses. This distinction matters because it affects your gross profit and margins.
A good method for small businesses to calculate COGS is:
Take beginning inventory + purchases made during the period – ending inventory.
Step 4: Determine gross profit and gross margin. Subtract direct costs from revenue to get gross profit. Gross margin expresses that number as a percentage of revenue and helps you evaluate pricing and efficiency over time.
Step 5: Include other income and expenses. Interest income, dividends, asset sales, or one-off losses don’t always fit neatly into operating categories. These still belong on the P&L, just separated so they don’t distort day-to-day performance.
Step 6: Arrive at net profit. Subtract total expenses from gross profit. A positive number means the business earned money during that period. If you come out with a negative number, go back over your P&L to find where the financial leak is coming from.
Final Thoughts
Having a P&L statement can be extremely helpful when you’re trying to make decisions for your DMV business, but only if the underlying bookkeeping is accurate.
Reports are only as useful as the quality of data that’s in them.
So, if you think your bookkeeping may not be up to snuff, let’s start there. Or maybe you’ve used a P&L statement in your business for a while and want to know what it can really show you about how your business functions.
Wherever you’re at, let’s talk P&Ls:
calendly.com/cfosg_growth/sales-consultation
FAQs
“What is the difference between a P&L and a Balance Sheet?”
A P&L shows the story of your business over a specific period (like a month or a year). It tells you if you’re profitable. A Balance Sheet is more of a snapshot of a single moment in time, showing exactly what you own (assets), what you owe (liabilities), and what’s left for you (equity). You need both to see the full picture.
“Why does my P&L show a profit, but I have no cash in the bank?”
Profit and cash are not the same. Your P&L might show a profit because you billed a client, but if they haven’t paid you yet, that money isn’t in the bank. Also, things like loan principal payments or buying equipment (assets) use up cash but don’t show up as “expenses” on your P&L.
“How often should I look at my P&L?”
At a minimum, you should review your P&L once a month. If you only look at it during tax season, you’re looking at a map of where you were a year ago. Monthly reviews allow you to catch financial leaks or overspending on subscriptions and utilities before they become major problems.
“What is a good gross profit margin for a small business?”
There isn’t one magic number because it depends on your industry. However, the goal is to have a margin high enough to cover your overhead (rent, software, etc.) and still leave you with a net profit. If your gross margin is shrinking, it’s a signal that your supplier costs are rising or you need to raise your prices.
“Should I use cash or accrual basis for my P&L?”
Cash basis records income when the money hits your bank. It’s simpler and reflects your bank balance. Whereas accrual basis records income when you send the invoice. This is better for seeing the true performance of your business activities, regardless of when the check clears. Most micro-businesses start with cash, but as you grow or hold inventory, your CPA may require you to switch to accrual.
“Can I automate my P&L, or do I have to do it manually?”
You can automate most of it. By using accounting software and linking your business bank account, most of your transactions will flow in automatically. Your job (or mine) is simply to categorize them so they land in the right spot on the report. It saves hours of manual data entry and reduces typos.