Am I making money? (ask your P&L)
Following last week’s newsletter which hopefully helped to internalise why you, yes you awesome entrepreneur you, should keep reading Tiny CFO, I’m excited to share the first of a mini-series on financial statements.
A word of caution. Millions of pages have been written on these things and there is a lot more that can be explained, but won’t be here, because a) you’d hit unsubscribe faster than I say P&L, and b) it’s my goal to help you understand the 101 not to turn you into a finance pro. So take this as a light intro rather than “all there is to know”.
Anyway – the P&L, aka the Profit and Loss Statement, aka Statement of Operations, aka Income Statement, aka Statement of Earnings. (Yeah, I also have nothing but rage towards whoever decided it would be a great idea to give this one document a bunch of different names.)
What does it do?
In the grand scheme of things, you either have a company that’s making money, or a company that’s losing money – it’s that simple. A company that’s making money by selling products or services is financially sustainable on its own. A company that’s losing money is on life support and someone needs to keep pouring money in to keep it afloat (you, your grandma, your VC).
The P&L will tell you which kind of business you have.
By showing you total Sales (or Revenue, as these terms tend to be used interchangeably), any costs directly associated with making those sales (Cost of Sales), and then any costs that keep the company running but can’t be directly linked to revenue (Operating Expenses, or OpEx).
Example: If you have a company that sells plant pots, your Sales figure is how much money you got for selling them, your Cost of Sales is whatever it cost to either buy the pots you sold from someone else or to make them, and your OpEx are things like Jake the customer service guy’s salary and your Shopify subscription.
Sales minus Cost of Sales spits out a number called Gross Profit, and you need it to be sizeable, because don’t forget you still need to pay Jake and Shopify. Whatever is left after you deduct all the OpEx (Jake and Shopify) is called Net Profit, and if it comes with a minus sign, we call it a Loss and put a sad face next to it.
A P&L is always shown for a particular time period – a month, a quarter, a year – and it makes sense to view it alongside a couple of previous periods to see how things are looking over time. 2019 Net Profit of $10M is great if it was $1M in 2018, but a lot less great if it used to be $50M.
A company that’s doing well has a P&L where Net Profit is a positive number that keeps going up over time. That answers the question in the subject line: Yep, you’re making money.
Next week – the Balance Sheet.
Love and cash flow,
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