The profit and loss statement (also called an income statement) is a summary of income and expenses for your business over a period of time. It’s prepared at regular intervals – usually monthly and at the end of the financial year.
Use the financial statement template below to create a profit and loss statement. Add as many categories into the spreadsheet as you need, particularly in the sales revenue and expenses area.
Tips for doing a profit and loss statement:
- Create a profit and loss statement to analyse all income and expense categories.
- Try to complete a profit and loss statement monthly – you’ll get a better understanding of your income and costs.
- Recognise areas that need more analysis, and take action before small problems become big problems, such as increased business expenses forcing you to re-price your goods to keep making a profit.
- Learn how to read financial statements, calculate profit and loss, and the cost of goods by attending a financial management workshop.
Cash flow statement
A cash flow statement is a summary of money coming into and going out of the business for a set time period. It’s prepared monthly and at the end of the financial year.
Use the financial statement template above to prepare a cash flow statement.
Cash flow from operating activities
Operating activities are the day-to-day results of buying and selling of goods and services, and usually include:
- receipts from income
- payment for expenses and employees
- funding of debtors
- funding to and from suppliers
- stock movements.
Cash flow from investing activities
Investing activities include investments in future business activities, for example buying and selling fixed assets. This type of cash flow can include items such as:
- payment for purchase of plant, equipment and property
- proceeds from selling the above
- payment for a new investment
- proceeds from selling an investment.
Cash flow from financing activities
Financing activities are how a business finances itself, and include:
- extra money the owners inject into the business
- money the business borrows
- money others borrowed from the business that they payback
- money the owners take out of the business.
Net operating cash flow
Net operating cash flow is the amount of cash that a business has after paying its bills. If a business has a number of overdue bills, these do not affect the cash flow statement until they’re paid in cash.
A cash flow forecast will help you measure and monitor how the business is operating.
Cash flow and warning signals
The cash flow statement can provide helpful warning signals to avoid future financial troubles. Some potential warning signs are when:
- cash receipts are less than cash payments – you’re running out of money
- net operating cash flow is an outflow – cash flow is negative
- net operating cash flow is less than profit after tax – you’re spending more than you earn.
The balance sheet is a general snapshot of the financial health of a business on a given day. You would normally complete a balance sheet at the end of a month or financial year.
Once you have a profit and loss statement and cash flow statement, you can complete a balance sheet, which includes:
- assets such as cash, stock, land, buildings, equipment, money others owe the business
- liabilities such as money owed to suppliers or the tax department, loans, credit card debt
- net worth – the value of the business after deducting what the business owes, also known as the balance sheet equation or equity.
Accounting packages often offer balance sheet reports. You can also ask your accountant to prepare your balance sheet.