Our lending experts are here to answer your toughest questions about small business financing. Shanna McClearn, a business development officer here at Opportunity Fund, shares her insights on lending with this Q&A about P&L statements. Continue reading to find out what they are, why you need to create one, and how it can help you get the loan your business needs.

Our lending experts are here to answer your toughest questions about small business financing. Shanna McClearn, a business development officer here at Opportunity Fund, shares her insights on lending with this Q&A about P&L statements. Continue reading to find out what they are, why you need to create one, and how it can help you get the loan your business needs.

In our blog post about the loan application process, we talked about preparing financial documents before applying for a loan. One of the most important documents lenders want to see after tax returns and bank statements is a P&L statement.

If you aren’t finance savvy, a P&L (Profit and Loss) statement is a document that summarizes your small business’ earnings and expenditures. Sometimes referred to as an income statement, a P&L shows how your business is doing over a period of time. It’s important to have an accurate P&L statement if you want an affordable loan to grow your small business. Keep reading to learn why.

 

Q: Why should business owners create a P&L statement?

A: Profit and loss statements are used to help business owners keep track of what is going on in their business and prove to lenders they can afford a loan. Having cash in the bank doesn’t always tell the full story. An owner can have a lot of cash in the bank, but that may be because they are not paying their rent or not paying all of their taxes. There’s no way to really tell without proper financial statements.

Owners need to know their numbers.  They should know their monthly/quarterly/annual sales and expenses. This helps owners track trends in their profits and spending. You need to know when and where to make adjustments before you’re running a deficit. Without a P&L, neither the business owner nor a lender will accurately know if the business is actually making money in the long-term.

Q: How does a P&L work with other financial documents? What’s the difference?

A: The P&L, Balance Sheet, and Cash Flow Statements are all interrelated. For example, the net income from the P&L is reported in the equity section of the balance sheet. If a business owner prepares the P&L on a cash basis versus an accrual basis, then cash flow from operating activities (i.e. cash from sales and cash paid to vendors or employees) would be included in the cash flow statement. Even if it may seem redundant, all of these financial documents paints a complete, detailed picture of how your business is doing.

Q: How will preparing financial documents help me get an affordable loan?

A: Besides a tax return, a profit and loss statement is the only other document that can tell a lender how the business is doing. Lenders need to be able to determine if the business is generating enough cash flow to pay the business expenses plus the proposed loan payment. Without a P&L, lenders won’t be able to calculate if the business is able to support a loan payment. If a lender doesn’t ask to see financial statements, chances are high that they are preying on you with an unaffordable loan that will cripple your business.

Q: What makes a stellar P&L statement stand out?

A: The more detailed, the better. Lenders want to know the source of the sales revenues. These type of details help lender truly understand the operations of the company. P&Ls that only show total sales and total expenses, with no itemization, are not really helpful. Here are a few examples of good itemization:

  • For a restaurant: breakdown your revenues from food sales versus liquor, beverages, or other merchandise.  
  • For a service company: breakdown your revenues from ongoing contracts versus one-time customers.
  • In general: it’s important to itemize your expenses so that lenders can see detailed cost of goods sold (COGS) and operating expenses like rent, payroll, and advertising.  It’s also good to note if there were any one-time expenses included on the P&L, like legal fees related to a lawsuit or start-up costs for a new product line.

From a lender’s perspective, accrual based accounting is better than cash based accounting because it’s a more accurate way of recording when revenues and expenses are recognized instead of paid. Discuss this with your accountant to see if this is possible for your business.

Q: What mistakes do borrowers make when preparing their financial statements and can borrowers avoid those mistakes?

A: The biggest mistake that small business owners make with their financial statements is taking a hands-off approach.  It’s understandable that small business owners are busy, and financial statements may not be their core competency. Many owners just pass along information to their bookkeeper or accountant and leave it up to that person to take care of all the financials. However, it’s important to take the time to understand what the numbers on the statements mean. You should learn how to read the financial statements to decipher things like how products are selling period-over-period, how product pricing may compare to expenses, and how expenses are trending each period.

Another big mistake small business owners make is only creating financial statements once a year. If you are only tracking revenues and expenses on a yearly basis, it’s hard to keep track of things because you are referring to outdated information. For instance, if adjustments to pricing need to be made or if the rental contract needs to be renegotiated, it’s difficult to know what adjustments to make if you don’t know and track the company’s numbers.  

Q: How do I get started?

A: Start by having a discussion with your accountant or bookkeeper. Collect your records of sales and expenses, calculate net income, and fill out a formatted document that will cleanly show your net income.

For a detailed guide on creating a P&L statement, check out this handbook by Zions Bank:

How to Prepare a Profit and Loss (Income) Statement

 

For information about Opportunity Fund’s small business loans, please contact us at 866-299-8173 or loans@opportunityfund.org.  For questions about your existing loan or other customer service questions, please contact us at 866-299-8173 or sbhelp@opportunityfund.org.


Opportunity Fund is California’s largest and fastest-growing nonprofit lender to small businesses. In FY16, we made $60M in loans to help more than 2,200 small business owners invest in their businesses.  Opportunity Fund invests in small business owners who do not have access to traditional financing. As a founding member and signatory to the Borrower’s Bill of Rights, we believe in the important role small businesses play in our community and the economy, and we aim to help owners financially succeed.

Visit us online at http://opportunityfundloan.org and follow us on Facebook and Twitter

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