How to Create a Profit/Loss Statement
What is a Profit/Loss Statement and how can a family child care provider make use of one?
A Profit/Loss Statement is a financial statement that summarizes your income and expenses for a specific period of time. You can prepare such a statement monthly, quarterly or annually. Your annual Profit/Loss Statement is the IRS Form 1040 Schedule C Profit or Loss From Business that you file each year with your tax forms. This form shows your income and all your business expenses. The bottom line of this form, line 31, represents your profit (or loss).
What use can you make of a Profit/Loss Statement?
If you want to borrow money to buy or refinance your home or make a home improvement, the bank will want to examine your Schedule C to see whether your profit can justify the loan.
As I've written elsewhere, your Schedule C is not an accurate reflection of your ability to pay back a loan. Instead, you may want you to prepare a monthly or quarterly Profit/Loss Statement that shows your actual income and expenses for that period.
When you add the monthly loan payment to the list of expenses, you can more easily show the bank that you can afford to pay the loan back. Sometimes providers need to show a Profit/Loss Statement if they are applying for a grant, or as a requirement for participating in a training program. Or, such a statement can be a helpful part of a general business plan.
Even if you are not required to create a Profit/Loss Statement, it's a useful exercise to help you track your financial progress over time, spot problems (too little income, too many expenses) early on and take steps to address them. I think it can be helpful to look at your Schedule C each year and compare it to previous years. Ideally, you want your income to increase and your expenses to decrease over time. This will result in bigger profits and more money for you to meet your own financial goals.
Example of a Profit/Loss Statement
The basic content of a Profit/Loss Statement is a breakdown of your sources of income and expenses. As we have said, your Schedule C is such a statement for the year.
To create a Profit/Loss Statement for a month or quarter requires some additional work. It's relatively easy to record your income for any particular month or quarter.
Your income will include parent tuition and fees, CACFP reimbursements, subsidy payments, and grants. Some expenses are easy to track by month or quarter. Other expenses that occur more infrequently need to be accounted for by spreading them over each month. In other words, if you pay your property taxes twice a year, you'd take the total amount and divide by twelve months and enter the monthly amount in a monthly Profit/Loss Statement.
Similarly, take your annual house depreciation (or and other annual depreciation deduction) and spread it monthly. If you use the KidKare software program, you can use its Schedule C Worksheet to create a Profit/Loss Statement for a month, quarter, or for the year. This worksheet does not include food expenses, car expenses or depreciation deductions, so you must look at the separate reports for these expenses and add them to the Schedule C Worksheet after printing it out.
Summary
Profit/Loss Statements can be a useful tool to help you meet your financial goals. It can also be used in conjunction with a budget and cash flow statement to help you better manage your business.
Tom Copeland - www.tomcopelandblog.com
Image credit: https://www.score.org/resource/12-month-profit-and-loss-projection
For more information about a budget, see my book Family Child Care Business Planning Guide.
