When operating a business, it’s important to always screen the profit flow activity. You need to realize if you’re earning or not and how much you’re earning as well. The main goal of having a business is more than just to earn revenue, you need to earn profits as well and if you’re not earning as much as you think you are, then something is going wrong with your business. To avoid any complications from arising with your financial matters, you need to always screen the profit and loss budget every month to make sure you’re always on track with your finances. If you would like to know how to make one, this article will help you on creating a monthly and profit loss budget.
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What is a Profit and Loss Budget?
The profit and loss budget, or also known as the income statement or the statement of operations, is a financial summary of the expected income and expenses of a business on a monthly or quarterly basis. This is done to screen whether the business is doing well financially or not.
How to Calculate for Monthly Profit and Loss Budget
1. Prepare the Annual Budget
To prepare the annual budget, first, you need to review the approved business operating plan by your superior and take note of the activities you need to do for the budget period. Then these activities should be separated by labeling them if they are currently existing or if they are new activities for the new budget period. Then review the previous year’s monthly profit and loss statements and use that template to prepare for the current profit and loss budget. If you don’t have the last year’s statements and you need a template, refer to the sample templates provided above.
2. Calculate The Account For Profit and Loss
To do this you need to add up all your income and expenses of the current month and calculate its difference by subtracting the total expenses from the total income. The result is your profit and loss.
3. Monitor the Profit and Loss Budget
Divide your annual budget by equally separating them into months. Monitor the monthly budget by comparing it to the actual results of your profit and loss, analyze it, and if the results vary, and note down the variances whether if they are timing or permanent. A timing variance is the estimated result that didn’t occur yet but is expected to happen sometime in the future and a permanent variance is an instance that is unlikely to happen.
What are the components of a profit and loss report?
Here are the components of a profit and loss report:
- Revenue: The revenue serves as the net sales of your business assets as well as your non-operating revenue.
- Cost of Goods Sold: It is the costs of the products or services offered by the business.
- Gross Profit: This is the net revenue that does not include costs of sales. It is also known as gross income or gross margin.
- Operating Expenses: These expenses include administrative, general, and selling expenses that are vital to keeping a business running efficiently.
- Operating Income: This is the income that is deducted from the gross profit by operating expenses.
- Net Profit: This is the profit earned after the gross profit is subtracted by the total amount of the expenses of the business.
What are the different ways of writing a profit and loss statement?
Here are the different ways of writing a profit and loss statement:
- Single-Step Method: It determines the business’ net income by subtracting expenses and losses from revenue and gains. It uses only a single subtotal for revenue items and a single subtotal for all expense items.
- Multiple-Step Method: This method separates the operating revenue from the operating expenses from other types of revenue and expenses as well to calculate its gross profit.
Once you’re done creating your budget, make sure to review it first and check to see if there are any errors with the information you’ve input by double-checking all the numbers you’ve obtained and calculated to come up with your budget. To help you get started making the profit and loss budget, download our free sample templates above to use as your guide!
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