What’s in a P&L – the Structure

The information value that comes from a P&L can be increased if it is tailored to your business.  The P&L should be customized based on the products or services you provide to your customer, the types of direct costs that you incur in delivering and supporting these products and buy levitra nz bayer services and the types of expenses you incur in developing, selling and marketing your offering and in providing administrative support to your business.

Many businesses structure their P&L along the same lines as their tax return with a single revenue line and costs randomly arranged in a single grouping on the statement.   However, the purpose of a tax return is to report the economic results of your business so that you can turn over a portion of your profits to the government.  Tax regulations and tax rates are established based on a complex combination of government fiscal, social and political agendas, none of which are concerned with measuring or improving the financial performance of your business.  Good accounting should always be performed on a monthly basis and you shouldn’t wait until the tax return is due to record items such as depreciation, amortization and fixed asset additions.  A tax return can always be prepared from a P&L when accounting is timely, consistent and accurate.

There are several standard sections of a traditional P&L, the individual line item contents of which can be tailored to your business.  The most common of these are:

  • Revenue – Revenue is money that you have earned from sales to your customers.  It can come from one or more product or service offerings which you can individually show on the face of the P&L.  I generally put major product lines or service offerings on the P&L but develop reports with individual product detail to avoid clutter.
  • Cost of Goods Sold – Cost of Goods Sold is the direct cost of providing goods and services to your customer.  It includes items such as materials, labor, manufacturing plants, in-bound freight and service resources.  You can generally organize costs under labor, variable and fixed overhead elements to provide you with additional insight into financial performance and your financial model.
  • Other Costs  – These costs are similar and quite often are reported as a separate component of Cost of Goods Sold.  What distinguishes them, however, is that they are generally consist of the costs of delivering product to the customer or supporting it after sale such as for a warranty claim.
  • Gross Margin or Gross Profit – Gross margin and gross profit are often used interchangeably.  Gross profit is the amount of money you make from providing your product or service to a customer and providing post-sale support.
  • Operating Expenses – Operating expenses are the costs you incur to develop, market and sell your product and to provide administrative support to your business.  They are generally broken into 3 or 4 categories on the P&L which include 1) Research and Development; 2) Marketing; 3) Sales and 4) General and Administrative Expenses.  Marketing expenses are the costs of developing your brand, advertising and generating customer awareness.  Sales expenses are the direct costs of engaging with a prospective customer to win the deal.
  • Operating Income – Operating income is the financial statement line item that shows the financial performance of your business from its operations in a given period.  It is one of the most important measurements for you to track as it can be influenced by revenue growth or decline and changes in your business model.
  • Financing and Taxation Costs – Interest income and expense are non-operational in nature and represent the impact of your financing and investing decision on the financial performance of the business.   Your business may or may not have an income tax line on your P&L depending on the type of corporate and tax structure.
  • Net Income – Net income represents the complete financial performance of your business over a period of time.  Net income is not a measure of cash generated over this period, however.  To determine the amount of cash generated you have to analyze the balance sheet to understand the changes in assets and liabilities, capital investments, financing, equity transactions and non-cash expenses recognized.

I’ve included an example P&L below for a manufacturing company that also provides services to their customers.  This should give you a good idea of a properly structured P&L that compares year-on-year business performance and provides business model insight by focusing on key line items as a percentage of revenue.





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