Table of Contents…
• What is a Profit and Loss Statement?
• Why do you need a Profit and Loss Statment?
• How do you create a Profit and Loss Statement?
• See a Sample Profit and Loss Statement
Creative professionals have two jobs, to be the creative asset and to run a business. In order to achieve long-term success, you have to become proficient at both. One of the most important elements to running a business is managing finances. There are a number of financial documents a business should have to monitor finances and make informed financial decisions. One of those documents is the Profit and Loss Statement.
In this post, we’ll cover the Profit and Loss Statement for a musician, why it’s needed and how to use it.
What is a Profit and Loss Statement?
A profit and loss statement provides a quick glance at your business financials over a certain amount of time. It gives you a snapshot of how your earnings are spent and the amount you are profiting from your business endeavors. It also tells you what your net earnings are (the amount left over after paying expenses) over a certain length of time by providing all sales and revenue along with expenses. This document is typically itemized meaning, expenses and revenue are each broken up into various categories to provide an in-depth analysis of how each business venture is doing compared to the other and likewise for expenses.
Why do you need a Profit and Loss Statement?
A profit and loss statement is a very useful tool for monitoring the overall financial health of your business. For a musician or creative professional, keeping an accurate profit and loss statement can help you make better financial decisions and give you motivation to explore ways to scale your business for even more profit.
A profit and loss statement helps you answer questions like…
- How much did I make last quarter?
- What were my expenses compared to my earnings last year?
- How much did I make performing so far this year?
- What percentage of my earnings typically goes to expenses?
The other great thing about a profit and loss statement is that it can serve as documentation for things like business loans, taxes, health care programs, self-employment credentials, etc. For example, when you apply for a business loan, the lending organization might want to see a snapshot of your finances to guage whether or not you’re capable of maintaining loan payments.
How do you create a Profit and Loss Statement?
To create a profit and loss statement for your music business, the first thing you’ll need is sales and revenue data. It would be helpful if you can tally up this data from the past year as a starting point. However, it’s not completely necessary if you don’t have it yet or haven’t captured this data. But you do need to start collecting and keeping track of your revenues if you’re not already.
Whichever timeframe you choose, the last year or the past 30 days or something to that effect, tally up all of your earnings over that length of time and break it up into categories. For example, if you earn money from various sources such as performance payments, royalties, sound engineering, voice-over work, merchandise, etc; seperate your earnings out into their respective categories. Then, list each of the categories along with the amount you earned for each category next to it. Add them up and now you have the first part of your profit and loss statement.
Next, do the same with your expenses. Seperate all of your expenses into different categories. I like to use tax categories as a framework to break up my expenses because it makes it easier for me to do taxes. Here are some example categories…
- Advertising
- Business Travel
- Commissions
- Meals and Entertainment
- Repairs and Maintenance
- Supplies
- Office Expenses
- Equipment
- Stage Attire
For a full list of sample expense categories for musicians, see our post 7 Tax Questions Every Musician Should Answer.
Once you have your revenues added up, and your expenses added up, the last step is to show your net profit. You can calculate this by subtracting your expenses from your revenues. This gives you the amount you have left over after your expenses during a specified timeframe.
Below is a sample Profit and Loss Statement for a musician from the first quarter of 2015.
In the above example, you can see a snapshot of financial activity for a musician over a 3 month period. Each revenue and expense category is listed seperately showing a breakdown of revenue or expenses allocated within each category during that 3 month period. This type of reporting provides a quick and easy way to review your financial transactions over a certain period of time. Armed with accurate financial data, you’ll be able to make informed financial decisions and plan for the future.
How do you keep track of your finances? Have you tried a Profit and Loss Statment? Share your thoughts in the comments section below.
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