Like many small business owners, you may be intimidated by your financial statements. “Financial statements? What are those?”
OK, so maybe your bookkeeping skills leave a little to be desired. You might even be afraid of the numbers, or of what the numbers might say about you and your ability to run a successful business. The good news is, you’re not alone. Most small business owners started their business to pursue a passion, not to crunch numbers.
However, to truly realize the financial health of your business, you need to have at least a basic understanding of your financials and what the numbers mean. This starts with a profit and loss (P&L) statement. Typically, a P&L is prepared around tax time. Block Advisors offers a free P&L summary as part of its small business tax prep services.
“Providing a free P&L summary has been extremely valuable for our small business clients,” said Ian Hardman, General Manager and Vice President of small business at H&R Block. “Many of our small business clients have never seen a P&L summary for their business or looked at their variable costs to understand how to optimize their profitability within their industry. We talk them through what the numbers mean, in an actionable and meaningful way.”
Profit and Loss (P&L) Statement 101
In a nutshell, a P&L statement details your business’s revenue and expenses over time (usually a calendar year). A P&L statement is also often referred to as an income statement or earnings statement. Depending on your business, it can be very simple or extremely complex. For now, let’s stick to the simple.
In your P&L summary, all your business expenses will be subtracted from your income. If the statement reveals that your revenue is higher than your expenses, congratulations, your business is profitable! If the reverse is true, you are running your business at a loss. And that’s OK too. Your pain is not in vain. On the tax side, business expenses lower your taxable income. If you have more expenses than income, this potentially creates a net operating loss that may be used to reduce taxes in another tax year. A net operating loss can be carried forward to more profitable business years to lower tax on profitable income in future tax years. A special wrinkle in the recent CARES Act legislation of 2020 allows businesses to carry back a net operating loss from 2018, 2019, and 2020 to earlier profitable years that can create an instant tax refund through an amended return.
Don’t worry if you aren’t confident in your ability to create a P&L statement. You can always hire an outside consultant to help you. Just make sure they’re willing and able to explain the numbers in a way that makes sense to you so you can take the appropriate next steps to run your business more efficiently. Numbers are just numbers on a page unless they can help paint a picture of your business story.
It can be intimidating and even embarrassing to share your financials with someone else, especially if you haven’t kept the best records.
“What surprises many of our clients is that this is the norm rather than the exception,” said Hardman. “The Block Advisors small business certified tax pros have an average of 12 years of experience, so they’ve pretty much seen it all. This is a no-judgment zone. Whether you bring us a shoebox full of wrinkled receipts or a fancy spreadsheet from your accounting software, we can help you.”
Block Advisors, a team within H&R Block, is dedicated to meeting the tax, bookkeeping and payroll needs of small business owners year-round. To start working with the tax experts at Block Advisors, visit blockadvisors.com.