What Is A Profit and Loss Statement?
A profit and loss statement summarizes your revenue, costs, and expenses incurred during a specific period, thus providing essential information that demonstrates your company’s ability to make a profit. But as an independent contractor, you might wonder if there are any benefits to using a profit and loss statement for your business. Let’s dive into what it looks like and how you can utilize this financial statement to your benefit in determining where to take your business next.
Benefits of a Profit and Loss Statement for an Independent Contractor
There are multiple benefits of having a profit and loss statement, even as an independent contractor, which includes the following:
Tax reporting – As an independent contractor, you are considered self-employed. Your P&L statement can assist you in reporting your income and deductions accurately while allowing you to calculate your taxable income.
Proof of income – Your P&L statement serves as proof of your income, allowing you to demonstrate your earnings for a variety of purposes, including applying for financing. It provides a comprehensive view of your revenue and expenses, giving a clear picture of your financial situation.
Financial planning – Analyzing your profit and loss gives you insights into your financial health and gives you the ability to make informed decisions about pricing, expenses, and investments while evaluating profitability and identifying areas for improvement.
Tax preparation – Maintaining accurate P&L statements simplifies tax preparation because you will have organized records of your income and expenses, thus saving time and reducing the potential stress of last-minute tax preparation.
Clearly, there are plenty of benefits to creating and maintaining your financial records to achieve an accurate P&L statement. But what needs to be a part of your P&L?
Components of a Profit and Loss Statement
Below are the components necessary to have an accurate profit and loss statement as you create it to reflect your finances as an independent contractor. Financial institutions consider who bears the burden if the job takes longer and/or costs more than originally anticipated. Let’s dive into the components of your P&L statement.
Revenue/Income
This section lists the income earned by the independent contractor from all your clients.
Cost of Goods Sold (COGS)
This includes all expenses incurred by the independent contractor to provide your services, including materials and tools.
Gross Profit
This is calculated by subtracting the total expenses from the total income.
Operating Expenses
Operating expenses include office rent, equipment, advertising, utilities, and administrative expenses. Essentially, any expenses that can not be associated with providing your service or creating your product fall into this category.
Creating a Profit and Loss Statement for an Independent Contractor
To create your own P&L statement, you need to gather financial information from your accounting software. Many software applications can pull the data together to create your financial statements, but here is an understanding of what data is utilized.
Gathering Financial Information
Your financial information will include all your expenses incurred, along with all the income generated by selling your products and services. By compiling all your receipts and bank statements, you can make sure that all financial transactions are accounted for in your P&L statement.
Organizing Data into the Appropriate Categories
Your accounting software can assist you in categorizing expenses, so you know whether an expense should be incorporated in your operating expenses or COGS. Since you are required to file a Schedule C as part of your taxes, having your data categorized can help you to complete the Schedule C accurately.
Identifying Areas for Improvement
As you look at your expenses and income, you can identify areas of improvement, either where you need to cut expenses or increase income by raising the prices for your services.
Tips for Maximizing Profits as an Independent Contractor
There are several options available to maximize your profits as an independent contractor. Remember that being an independent contractor can present an unique set of challenges, so the strategies you choose can greatly effect your ability to be profitable despite these challenges. Here are a few strategies to increase your income and grow your business effectively.
- Diversify your income streams – Take on multiple clients and projects. This way, if one project ends or one client isn’t available, you still can have a stream of income.
- Networking – Building relationships is key to success since it can give you access to new projects, clients, and resources to grow your business.
- Offer unique services – Building income means attracting new clients by standing out from the crowd. Specializing in a specific industry or offering custom packages and services can give you options to utilize your skills in new and innovative ways that benefit your clients and create new income sources.
- Budgeting and financial planning – By setting aside money for taxes, creating a budget to account for your irregular income, and setting financial goals, you can maximize your income and use it to create more over time. This also gives you a clear idea of your current financial situation.
- Staying organized – Clients want to see you meet deadlines and deliver a quality product or service. By staying organized, you meet their expectations and increase the likelihood that they will recommend you to others or use you again for another project.
- Strong online presence – Today, everyone is online looking for contractors and businesses. Having a strong online presence is key to growing your income by letting people know about the services and products you offer where they are looking for them.
- Upselling and cross-selling – The truth is that as an independent contractor, you have the ability to offer additional services or products to existing clients without having to spend the time and cash to attract new clients. As you get to know the needs of your clients, tailor your offerings to address those needs and build a profitable relationship.
Building up your income often starts by understanding what you can realistically offer your clients and how much time your services require from you. By staying organized and tracking the time you spend on a project, you can keep your pricing realistic and build income streams to maximize your profitability.
Common Mistakes to Avoid When Creating a Profit and Loss Statement
As an independent contractor, building an accurate P&L statement is key to understanding whether you are profitable or not. With that in mind, here are a few mistakes to avoid as you create your P&L statement.
- Not accounting correctly for paying yourself.
- Including costs of goods sold when your business doesn’t sell any goods.
- Inconsistent accounting, such as flipping between cash and accrual.
- Putting the wrong date in the wrong place. Accuracy is key to having a P&L that can give you a true picture of your business.
When you prepare your P&L statement, accuracy is key to avoiding questions and revisions, which can slow down your application for a business loan or make purchases to expand your business. Now, let’s determine what you need to ensure an accurate P&L statement.
What should go into a P&L statement?
A P&L statement gives you a snapshot of what your business owes and owns at a specific moment in time. All your expenses and income should be accounted for in your P&L statement, as mentioned in the categories above. By comparing your P&L statements, you can identify trends in spending and sales. But what does it mean to choose accrual versus cash? And is your P&L different from your income statement? Let’s find out.
Accrual basis
Accrual basis accounting is a method of recording accounting for revenue when it is earned and expenses when they are incurred. That means income and expenses are reported as soon as they are generated, not when money changes hands.
Cash basis
Cash basis accounting only recognizes revenues and expenses when the cash is collected or paid out. All financial information would be triggered by events that have already happened or are currently happening.
Accrual basis is seen as more relevant than cash basis because it is able to provide more useful information about future cash flows, but it also includes estimations, which might need to be corrected later.
Income Statement
An income statement is similar to a P&L statement, and the terms are often used interchangeably. However, your income statement can be more comprehensive than a P&L statement.
Frequently Asked Questions
How Often Should I Prepare a P&L Statement?
P&L statements can be created every month, every quarter, or annually. Some financial institutions might require a year-to-date P&L statement, depending on their lending requirements. As an independent contractor, you can determine the frequency that fits the needs of your business.
How do independent contractors file their taxes?
Gather your 1099 forms, calculate your business deductions, and fill out your Schedule C. Using your P&L statement can assist you in filling out your forms accurately.
Can you do a profit and loss statement for self-employed?
Yes, you can complete a P&L for the self-employed since it will help you to determine where your income is coming from and what expenses you have.
Can I Use Accounting Software to Generate P&L Statements?
Yes, your accounting software should be able to generate these financial statements for independent contractors, regardless of the size of your business. Follow the directions on your accounting software to determine how to generate this report.
What Is AccountsBalance?
AccountsBalance is a monthly bookkeeping service specialized for agencies & SAAS companies.
We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month.
You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis each month so you and your business partners can make better business decisions.
Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.
And here’s some free resources:
In Summary
As an independent contractor, financial statements still provide a variety of information that can assist you in determining whether you are profitable, your income streams, and identify areas where you can implement cost-saving measures. By using your P&L statements effectively, you can grow your business and build a strong clientele.
