What does P&L stand for?
A P&L stands for a Profit and Loss Statement. While I'd prefer that it be named a BOOM! (Boatloads Of Operating Profits), the "powers that be" don't consult me in decisions like awesome names for financial reports. And let's face it, businesses lose money sometimes. Sometimes too much of the time. I'm hoping this blog helps me and my staff avoid running in the negative as well as any other small business owner out there.
What information does a P&L contain?
The P&L is the most important document to look at as a business owner. And you need to be reviewing this at least once a month, and preferably weekly. Why?
Because it lets you know if you are on track towards your goals and if you are actually making money. If you aren't making money, it shows where that money is disappearing to.
A P&L contains your revenue, the amount you pay out in labor and materials as well as all other costs associated with running your business. Check out the color coded image below:
Breaking Down the Sections:
- Income - this shows how much money you've generated. This could also be known as Revenue or Sales.
- Cost of Goods Sold - otherwise known as COGS; this shows the costs associated with delivering your product or service to the customer. That could include any materials or equipment for a job or a customer, plus any labor that was directly applied to that transaction or job. It does not include other expenses related to running your business, like marketing or overhead or insurance.
- Gross Profit - this is Revenues - COGS. This shows you how much money you have left over after the costs to produce and deliver your product or service. This money will be used to cover all other expenses of your business.
- Expenses - these include most of the overhead expenses associated with running a business. This includes insurance, property and rent costs, licensing, bank fees, credit card fees, etc. etc. There can be a lot of expenses in running a business.
- Labor and Commissions - this category could be applied to COGS or could be overhead. For my painting franchise, our painters labor costs are applied to a particular job and so are COGS. My estimators and managers are not as they span multiple functions and would stay employed regardless of whether a job is occurring or not.
- Marketing - Something we do that is unique, but is an extremely useful, if not downright essential, way of tracking marketing effectiveness is to have a separate line item for each marketing channel. Rather than lump all marketing expenditures into one line called "Marketing", we break them out so we can see exactly how much we're spending per channel and how well those channels are performing. I'll go into more detail on that in subsequent posts.
- Net Income - this is the number you care the most about. It's how much profit you really make, or in other words, how much money you get to take home at the end of the day.
Understanding where the money comes from, where it's going, and why will help you make better decisions and make more money.
We'll explore these in more detail in the next post and how to use them to be more effective.
