We all hate preparing profit and loss statements, but they are necessary in the course of business. The following information is courtesy Richard J. Welt, Attorney at Law with McFerran & Burns, P.S.,Practicing Real Estate Law in Western Washington since 1986. Contact: (253) 284-3811 or www.mbs-law.com. While this article was tailored to fit with their bankruptcy series, it is also great advice and what you’ll need to prepare to apply for a loan as well.
If you are self-employed or running a business, filing bankruptcy involves preparing a profit and loss statement, commonly called a P&L. While this subject isn’t terribly interesting or attractive, it’s critically important to prepare accurate information for your bankruptcy lawyer.
What is a Profit & Loss Statement?
Relax! This isn’t algebra or calculus. This is simply a statement showing income-in and expenses-out for a specific period of time. For bankruptcy purposes, we focus on a month-by-month time frame. It shows whether you’re making money or losing it. This is important for your bankruptcy, and it’s important for you to understand for life after bankruptcy. Despite fancy finance terms we hear tossed around, business is about one thing: taking in more money than you spend. If you do that, you make a profit. If you don’t, you have a loss. It doesn’t matter if you’re a self-employed real estate broker or you’re running a multi-national corporation. You take in more than you spend, that’s good. You spend more than you take in, that’s bad.
Why are P&Ls necessary?
Consumer bankruptcy starts with CMI—“current monthly income.” This isn’t really current monthly income, but an average of the income for the six months prior to the month in which you file bankruptcy. So if you file in February, we need to know your income from August through January, broken down month by month.
If you have a job and get paid as an employee, we use pay stubs to figure this out. If you are self-employed, you guessed it, that’s where the profit and loss statements come in.
How to Create a P&L:
A typical profit and loss statement might look something like this:
1. Gross Receipts or Sales $_____________
2. Cost of Goods Sold $__________
3. Gross Profits (Subtract line 2 from line 1) $______________
4. Other Income $_____________
5. Gross Income (Add lines 3 and 4) $____________
6. Business Property Rent/Lease $___________
7. Salaries and Wages $ (note that if you pay yourself wages–like in a sub-chapter S corporation–you need to provide your pay stubs to your attorney)_______________
8. Employee Benefits $_____________
9. Equipment Lease Payments $________________
10. Interest Payments $_________________
11. Supplies $_______________
12. Utilities $_________________
13. Telephone $________________
14. Repairs and Maintenance $______________
15. Advertising $__________
16. Professional Fees $______________
17. Insurances $____________
18. Taxes $_______________
19. Total Expenses (Add lines 6 through 18) $_______________
NET INCOME $___________________ or (loss). Subtract line 19 from line 5 to get this number.
This is sometimes referred to as “the bottom line.”
These categories of income and expense will vary from business to business. But regardless of the business you’re in, you have income and you have expenses. It’s that simple. Keep in mind that the expenses refer only to BUSINESS expenses, not personal expenses.
Some Other Important Points:
First, some businesses are “cash basis” and some “accrual.” Regardless of whether you are on an accrual system, for bankruptcy purposes these reports need to be run on a cash basis. (Accrual accounting counts income invoiced even if it’s not received and this is not relevant for determining your income under the Bankruptcy Code. Everything we need to do for bankruptcy purposes must be on a cash basis.)
Second, draws or distributions to owners–shareholders, members, or proprietors–are not expenses! If you take in $10,000, have $5,000 in expenses, and take a $5,000 “draw” or “owners distribution,” you have $5,000 in profit, not zero.
Third, if you can’t figure out how to do your profit and loss statements, call an accountant or experienced bookkeeper who can help you. As with all information provided to your bankruptcy lawyer, the information must be accurate.
This Is Important for Bankruptcy and for Your Life after Bankruptcy
Taking control of your money begins with taking responsibility for it. That means knowing how much you have, where it’s coming from, where it’s going, and what it’s doing in the meantime. A properly prepared profit and loss statement will answer most of those questions.
POST SCRIPT (some technical stuff): The term “profit and loss statement” actually applies to accrual accounting, not cash accounting. In cash based accounting, the report is called a “Statement of Cash Receipts and Cash Disbursements” and the “bottom line” would be referred to as either the Excess or (Deficiency) of Cash Receipts over Cash Disbursements. However, most accounting software simply calls the reports “profit and loss statements,” so I use that term to keep things simple.
We continue to offer our signature one hour “Distressed Home Owner” consultations at the reduced rate of $150 per hour, and bankruptcy consultations are free. Call 253-284-3838, Option 1 to schedule an appointment at any of our 5 Puget Sound offices; Tacoma, Seattle (Northgate), Silverdale, Kent and Everett. We look forward to serving your legal needs in 2014.
Richard J. Welt
Attorney at Law
McFerran & Burns, P.S.
Phone: (253) 284-3811
Fax: (253) 284-3855