Financial reports are a great tool used by businesses to track their performance. One of the most popular and widely used financial reports is the Profit and Loss Statement.
Also known as a P&L, a Profit and Loss Statement tracks the total amount of income earned and costs incurred by a business over a set period of time. The main goal of a P&L is to determine if the business has made a profit or a loss for the period in question. However, other useful information can also be derived from the numbers shown in the report. The numbers do talk, if you know how to listen.
First, the basics. Profit is defined as financial gain; meaning that the total amount of money you’re bringing in is more than your costs of materials and business expenses. Paraphrasing the late American poet B.I.G; “Mo’ money [than costs], mo’ profit”.
In contrast, a loss happens when your operational costs are higher than the money coming in as business income.
I already know I’m making a profit, what else can a P&L help with?
P&Ls come in all shapes and sizes, and they will vary depending on the type of business being analysed.
If your operation relies heavily on the manufacturing of a physical product, the costs of goods sold (COGS) may greatly impact your profit, so it might pay to emphasise COGS in your report. Examples of COGS could include the materials used in production, packaging, delivery, and manufacturing labour. As a general rule, if you have a cost that increases in direct proportion to your increase in production, you might be looking at COGS.
For example, imagine you’re a baker. Your bigger bills are generally for flour, eggs, butter, and sugar. You’d want to hone in on reducing wastage and improving your yield. Minimising COGS to maximise your margin.
On the other hand, if your operation is based on services provided, you might need to dedicate more focus to your operational expenses. These are the costs of running your business, and they will tend to be somewhat fixed.
The best examples of these costs would be the rent paid for your office or working space, insurance, utilities, or subscriptions. Taking extra care of how you negotiate with your service providers, and how much use you can squeeze out of your fixed resources, could increase your profit.
Okay, but what does a P&L look like?
Roberto runs a catering business. He provides kai for parties and special events, and, even though he takes his equipment to each event to cook on-site, most of his prep work is done in a production kitchen.
This is Roberto’s profit and loss statement for the first quarter of the financial year:
| Sales and Income | Percentage of total income | |
|---|---|---|
| Event Catering | $50,000 | 83.30% |
| Cooking Masterclass | $10,000 | 16.67% |
| Total Income | $60,000 | 100% |
| Cost of Goods Sold | ||
| Fruit and Veggies | $7,000 | 11.60% |
| Butcher’s | $7,000 | 11.60% |
| Dry Goods | $5,000 | 8.30% |
| Equipment Rental (ad-hoc) | $1,000 | 1.60% |
| Total COGS | $20,000 | 33.30% |
| Gross Profit | $40,000 | 66.60% |
| Operational Expenses | ||
| Rent | $3,000 | 5% |
| Utilities (power, gas, wifi) | $1,500 | 2.50% |
| Advertisement | $500 | 0.80% |
| Total Expenses | $5,000 | 8.30% |
| Profit Before Tax | $35,000 | 58.30% |
| Taxes (not a real tax rate) | $4,500 | |
| Total Profit | $30,500 | 50.80% |
Looks nice, how do we interpret these numbers though?
Roberto is pleased with the profit of his operation. He might choose to use his profit to keep investing and growing his business, or perhaps he’ll go on a nice holiday to the Amalfi coast. That decision is up to him.
What he could also do is look at the proportion of his costs and expenses against his income, and use this information to make his operation more profitable. If 11.6% of his income is going towards his fruit and veggies, he could look at opportunities to develop better deals with his suppliers, for example.
Roberto might set up a goal for his business to lower that percentage to 10% for the next quarter. Additionally, if his allocated budget for advertising is only 0.8% of his income, he could look at expanding this budget to bring in more business. It might be time to shoot that commercial he’s been dreaming about.
This is what Roberto’s numbers are whispering in his ear. Being a savvy businessperson, he knows how to listen, and how to translate these coded whispers into strategic planning.
Similarly, a P&L can help your business grow, and give you the intel that you need to make vital decisions for the future of your business.
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