A P&L Statement is a whole lot easier to explain and understand than you might think.
I remember the first time I heard the term P&L statement from my accountant, I thought of the consumer goods corporation Procter and Gamble. Trying not to embarrass my accountant I pulled them aside and said, “It’s P&G, do you need inventory on their products that I have for my business? I didn’t think that particular brand would be worth noting. Should I be keeping track of that kind of stuff? I guess I have some tissue paper and paper towels?” My accountant stared at me in disbelief and repeated himself, “No, I mean your Profit and Loss statement.”
Luckily for me, my mouth is big enough for both my feet to fit in. I’m not proud of that conversation, but hey, hindsight is 20/20 and I have an up-to-date prescription because of it that I will be more than happy to explain to anyone who needs to know.
I will start with a simple graph (shown below)
For the sake of discussion let’s say that you have two kids, both of them come up to you and say, “Parent of mine, it’s the first of the year, we’re feeling ambitious and us as siblings want to open up a lemonade stand so that we can make some money for ourselves.” You being the loving and kind parent that you are understand that you’ll be the person providing the property and finances for them to start their new business that they’ve decided to call “Lively Lemonade, LLC” (You have some smart kids, that’s a name I would have thought was clever).
You take this information and you make a deal with them. Saying that you’ll make them a list of rules that they have to follow to the T.
- They have to keep track of the amount they make on a daily basis (Total Revenue).
- They have to keep track of how much they spend on lemons, sugar, cups and the occasional bottled water to sell to any passerby runners (Costs of Goods Sold).
- They must stay on top of how much waste they have at the end of each day (Depreciation).
- You can’t forget about the pitcher, the stirrer, the sign, the paint to paint the sign and the chairs to sit and relax on when business is slow (Utilities).
- Since they’re using your front yard as a point of sale, it would be ludicrous not to charge them monthly rent (luckily for you in this story you live in a wealthy neighborhood). Your kids are charging $.75 a pop. You put together $2.00 a month just in case there’s a slow month here or there.
If they follow this list of rules you’ll loan them $10.00 apiece. Being that it’s a loan, they have to pay you back.
A Year Later
Your kids have put forth an A effort, they have the looks of true hard workers on their face (the look of defeat and accomplishment all at the same time). They come to you with a problem, they want to grow their business and bring on their friend Sam, who lives down the road as an equal partner, but they aren’t sure if it would be worth it, financially, to bring on Sam.
Thank goodness you had them keep track of everything you had them keep track of, because now, they get to draw out the super, awesome, rocking, cool graph we have listed above.
The Lively Lemonade, LLC has a Total Revenue of $250.00 with a Gross profit of $220.00.
The gross profit is calculated by subtracting the Costs of Goods Sold which is of course $30.00, from the total revenue.
The Operating Expense of ($79.00)= rent ($24.00) + utilities ($15.00) + loan ($20.00) + depreciation ($20.00).
The net Income is $141.00 = Gross profit – Operating Expense.
We come to the dreary total of $141.00 made over the course of the year. They have to split right down the middle between the 2 of them to a whopping $70.50. That’s a grand total of $0.06 an hour for 4 hours a day, 5 days a week, for 52 weeks. As a kind parent looking at your kids P&L statement, unless they’ll be opening up a second location in another neighborhood, you should probably advise against adding Sam to their business, but I’m not going to tell you how to parent your imaginary kids.
As you move forward in your business for this 2017 year, utilize the P&L Statement as a compass to navigate to a direction of financial growth.