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How to Read Your P&L: The 3 Numbers Every Business Owner Should Track · Profit Points Podcast

• 0:00
  SPEAKER_00: Hey, glad you're here.
• 0:01
  SPEAKER_00: This is Profit Points, and I'm Megan Schwann, your accounting sidekick and certified profit first professional and fix the snips advisor.
• 0:09
  SPEAKER_00: If you're a small business owner who wants to actually understand what is happening in your business financially, not just survive it, but genuinely get it, you're in the right place.
• 0:20
  SPEAKER_00: Every episode covers one concept, uses real numbers, and ends with something you can actually do.
• 0:26
  SPEAKER_00: That's the deal.
• 0:27
  SPEAKER_00: Let's talk about today's topic.
• 0:31
  SPEAKER_00: If someone handed you your profit and loss statement right now and said, tell me what this is and what it means, would you know?
• 0:41
  SPEAKER_00: If the honest answer is not really, you are in the exactly right place.
• 0:47
  SPEAKER_00: And I promise this is going to be the most practical 12-ish minutes of your week.
• 0:52
  SPEAKER_00: I'm Megan Schwan, your accounting sidekick, and this is Profit Points, where we make financial statements feel less like a foreign language and more like a conversation.
• 1:03
  SPEAKER_00: Now, let's decode your PL together.
• 1:07
  SPEAKER_00: So, first things first, the profit and loss statement is also referred to as the income statement.
• 1:13
  SPEAKER_00: It is the single most important financial document in your business.
• 1:17
  SPEAKER_00: It tells you how much you made, how much you spent, and then what's left over.
• 1:22
  SPEAKER_00: And yet, despite that being the case, the majority of small business owners I talk to either never look at it or they look at it and feel immediately overwhelmed because nobody ever taught them how to read it.
• 1:38
  SPEAKER_00: Resonating with anybody?
• 1:41
  SPEAKER_00: Well, today we're gonna fix that.
• 1:43
  SPEAKER_00: We're gonna walk through a PL line by line, not with accounting jargon, but with plain English.
• 1:49
  SPEAKER_00: So that the next time your bookkeeper or accountant sends you your monthly statement, you actually know what you're looking at.
• 1:56
  SPEAKER_00: And shameless plug, if you haven't been receiving your statements or are behind on your bookkeeping, PyCake Accounting can help with that.
• 2:04
  SPEAKER_00: We can help with that.
• 2:05
  SPEAKER_00: So feel free to reach out or go to chatwithmeg.com for more information.
• 2:10
  SPEAKER_00: All right, enough of that.
• 2:11
  SPEAKER_00: Let's talk through the different sections of a PL.
• 2:15
  SPEAKER_00: A PL has three main sections.
• 2:18
  SPEAKER_00: Section one is your revenue.
• 2:20
  SPEAKER_00: This is everything that came into your business from sales or services or selling your mission if you're a nonprofit.
• 2:27
  SPEAKER_00: And if you have multiple revenue streams, like things like different services, different products, or different client categories, a good PL will also break those out separately.
• 2:38
  SPEAKER_00: So instead of just one number, it will be breaking out by type of revenue.
• 2:42
  SPEAKER_00: Um, and that way you can see which ones are performing and which ones aren't.
• 2:47
  SPEAKER_00: The total at the bottom of that section is referred to as your gross revenue.
• 2:52
  SPEAKER_00: Okay.
• 2:54
  SPEAKER_00: The next section is your cogs or cost of goods sold, or sometimes it's referred to as cost of services sold.
• 3:03
  SPEAKER_00: Most accounting software will still say cogs, though, but just says FYF.
• 3:08
  SPEAKER_00: This is where the direct cost of delivering your products or services is kept.
• 3:13
  SPEAKER_00: So things like materials, direct costs, those are things that all go under cogs.
• 3:21
  SPEAKER_00: So you subtract your cogs from your gross revenue, and then that gives you your gross profit.
• 3:28
  SPEAKER_00: This is a very important number because it tells you how much you're making before you even start paying for overhead.
• 3:35
  SPEAKER_00: So when people talk about your gross profit margins or your profit margins needing to be 30, 40% or more, typically, this is what this is where that number comes from.
• 3:46
  SPEAKER_00: It's from your gross profit number.
• 3:49
  SPEAKER_00: Section three is where your operating expenses are kept.
• 3:53
  SPEAKER_00: These are your overhead costs, things like rent, software, marketing, insurance, administrative expenses, typically CEO payroll.
• 4:02
  SPEAKER_00: If you are an S-corp or a C Corp, the cost of running the business is um recorded here.
• 4:12
  SPEAKER_00: Sorry.
• 4:13
  SPEAKER_00: Totally just doubled over my words.
• 4:15
  SPEAKER_00: So the expenses, the operating expenses, are the expenses that are not directly tied to delivering a specific service.
• 4:22
  SPEAKER_00: Typically, these are expenses that will not change with your increase in revenue unless you add more employees.
• 4:28
  SPEAKER_00: But typically, they won't change those, these are set costs or more non-variable costs, is another way of saying it.
• 4:35
  SPEAKER_00: So when you subtract your operating expenses from your gross profit number, the number after you subtract costs, that's your gross profit.
• 4:44
  SPEAKER_00: And then this is where you get your net profit number or your net loss number sometimes.
• 4:50
  SPEAKER_00: This sometimes is also referred to as your bottom line.
• 4:53
  SPEAKER_00: And that's the number that really, really matters because if you don't have profit left over, that means your business is operating at a loss.
• 5:03
  SPEAKER_00: Most of us understand a paycheck.
• 5:06
  SPEAKER_00: So I'm going to use this as kind of an example to demonstrate this concept.
• 5:10
  SPEAKER_00: You earn a certain amount.
• 5:12
  SPEAKER_00: Let's say it's$5,000 gross.
• 5:14
  SPEAKER_00: But after you take out taxes, health insurance, retirement contributions, your take home is$3,400.
• 5:23
  SPEAKER_00: Nobody really looks at their paycheck and says, I made$5,000 this month, right?
• 5:28
  SPEAKER_00: They typically say that they made$3,400.
• 5:31
  SPEAKER_00: They took home$3,400.
• 5:34
  SPEAKER_00: That's why this difference matters.
• 5:36
  SPEAKER_00: So your PL, it works the same way for your business.
• 5:40
  SPEAKER_00: Revenue is that gross number, what came in before anything went out.
• 5:45
  SPEAKER_00: And each section below is a different type of deduction if we're doing comparison.
• 5:50
  SPEAKER_00: So cost of goods sold takes out the direct cost of doing the work, operating expenses take out the overhead of running the business.
• 5:57
  SPEAKER_00: And then what's left over is that net profit.
• 5:59
  SPEAKER_00: This is your business's version of your take-home pay.
• 6:03
  SPEAKER_00: If you are a single member LLC, a partner, partnership, or an S-corp, typically that number has to also cover your draws or your distributions as well.
• 6:14
  SPEAKER_00: So you need to have a profitable number.
• 6:16
  SPEAKER_00: That number is what reflects what the business actually made.
• 6:20
  SPEAKER_00: Not the top line, the bottom one, which is why it's important to know what the number is.
• 6:27
  SPEAKER_00: And if you have things like loans and credit cards to pay, then that also has to come out of that net profit number, which is why sometimes if you are looking at your PL and you're like, okay, there's a profit there, but I feel like I have nothing left over, it's exactly for this reason.
• 6:45
  SPEAKER_00: But that's another conversation for another day.
• 6:48
  SPEAKER_00: So now that we have the picture of a PL and what it actually is, what each section is telling you, let's talk about how to actually use it.
• 6:57
  SPEAKER_00: Because understanding the structure is one thing, knowing what to look at every month so it actually informs your decisions, that is really where this gets useful.
• 7:06
  SPEAKER_00: So once you raise your PL, here are three numbers to track monthly.
• 7:10
  SPEAKER_00: One is your gross margin, like we talked about.
• 7:13
  SPEAKER_00: That is the number after your cost of goods or service is sold.
• 7:17
  SPEAKER_00: Healthy businesses target is typically above that 30% range.
• 7:24
  SPEAKER_00: Number two is your net margin.
• 7:26
  SPEAKER_00: Target is usually around 20 to 30%.
• 7:30
  SPEAKER_00: Um, and uh oh, let me back up too.
• 7:34
  SPEAKER_00: For the gross margin, if you have a service-based business, typically that number, that gross profit margin will be even higher than for 30, 40%.
• 7:42
  SPEAKER_00: Sometimes it's around 50 to 60%, depending on what your overhead actually looks like.
• 7:47
  SPEAKER_00: Um, but bottom line, it needs to be profitable.
• 7:50
  SPEAKER_00: Number two is like I mentioned, the net profit margin.
• 7:53
  SPEAKER_00: So that's after all those expenses, you should still have a profit at that bottom line number.
• 7:58
  SPEAKER_00: You want to target that 20 to 30% down there as well.
• 8:02
  SPEAKER_00: And then three is your largest expense category.
• 8:05
  SPEAKER_00: Take a look at whatever it is, know it, watch it, question it if it's growing.
• 8:11
  SPEAKER_00: Those are the three numbers that you can easily track consistently, and it will tell you more about your business, especially if you haven't been tracking KPIs.
• 8:21
  SPEAKER_00: It'll tell you more about your business than any dashboard or app.
• 8:24
  SPEAKER_00: Sometimes those things can complicate things versus just making you actually use the data that's there in front of you.
• 8:32
  SPEAKER_00: So take this three numbers gross profit margin, net profit margin, and what your largest expense category is.
• 8:39
  SPEAKER_00: If you have up-to-date books, you will be able to easily look for those numbers.
• 8:44
  SPEAKER_00: And if not, like I said, you might need to, we might need to have a chat.
• 8:49
  SPEAKER_00: Okay, so action set for this episode, pull your most recent PL or ask your bookkeeper to send it and then find those three numbers: your gross profit margin, your net profit margin, and down and then we've talked about the law.
• 9:15
  SPEAKER_00: You know, it's not a judgment, even if it's a lot, that's okay.
• 9:20
  SPEAKER_00: That just means that there's something to be addressed, it's something to look at, something to explore, something to make sure you understand why.
• 9:27
  SPEAKER_00: Um, it's a map.
• 9:29
  SPEAKER_00: Once you know how to read it, you can stop being afraid of it and start leading into it and start using it to lead your business.
• 9:36
  SPEAKER_00: If your PL is a mess or you don't have one at all, that's the first thing that we can fix together outside Kick Accounting.
• 9:44
  SPEAKER_00: So again, book a strategy call if you need one.
• 9:47
  SPEAKER_00: Go to chatwithmeg.com, it takes you to my website, and I will see you next time.
• 9:52
  unknown: Bye.
• 9:53
  SPEAKER_00: All right, that's your episode this time.
• 9:55
  SPEAKER_00: Don't forget your action step.
• 9:57
  SPEAKER_00: I want you to actually do it, not just add it to the list.
• 10:00
  SPEAKER_00: If this episode was helpful, share it with a fellow business owner who needs to hear it.
• 10:05
  SPEAKER_00: And if you're ready to go deeper on your specific numbers, book a strategy call with Sidekick Accounting.
• 10:10
  SPEAKER_00: Go to chatwithmeg.com, and I'll see you next time on Profit Points.