Profit & Loss

Profit & Loss

Module 8: Profit & Loss

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🎯 Our goal in this module is to introduce you to the Profit & Loss Statement and help you start using it in your business.
The Profit & Loss Statement is basically another simple math problem:
SalesCost of Sales=Gross Profit\text{Sales}-\text{Cost of Sales}=\text{Gross Profit}
Gross ProfitOperating Expenses=Net Profit\text{Gross Profit}-\text{Operating Expenses}=\text{Net Profit}

(or Loss if negative 😳😬)

As you can see, it’s essentially about subtraction.

The Profit & Loss Statement is easy to calculate and is a very important tool for measuring how your business is performing monthly, quarterly, annually—will you be making money or losing money over time?

To determine how much money (net profit) you will be making or losing, start by estimating your Sales. 

If this sounds somewhat familiar to you, it’s because you started this process back in our Napkin Math modules and then again in our Target Market & Marketing Plan module.

Step 1: Estimate Your Sales

  • How many products do you expect to sell each month, or if you are selling a service, how many clients do you expect to acquire each month?
  • How much money will you receive for each product sale or for each client?
  • Multiply the number of products sold or clients acquired by the price that you will be charging for each.

Now you have your first month’s Sales projection.

Just go through this same process for Month 2, Month 3, and so on all the way through Year 1.  Then, do the same for Year 2.

For Years 3-5, there is no need to do monthly projections—just estimate Total Sales for each of these years.

Step 2: Estimate Your Cost of Sales

Cost of Sales are the costs that you will incur when you sell your product/service.  These are variable, or direct costs because they will change as your Sales increase or decrease.

For example, if you are manufacturing a product to sell, or if you are buying a product that you will re-sell to your customers, then record the costs of making or purchasing that product here.

Also, you will need to include all other costs that you incur when you sell a product/service, such as packaging and distribution or delivery of a product to the customer. 

Include any cost that you incur directly in order to complete the sale of your product/service.

Step 3: Estimate Your Operating Expenses

Operating Expenses are all the costs required to operate your business. 

These are also called fixed, or indirect costs, meaning that you will have to pay these expenses whether or not you make any sales.

Some examples of operating costs are rent, utilities, advertising, office supplies, accounting, payroll and payroll taxes, vehicles, insurance, and legal and license fees.  These expenses are always there, regardless of whether you have low sales, high sales, or no sales at all.

Note: It’s good to create these projections monthly for the first two years.  This will help you to think through the startup and early growth period of your business in great detail.  Doing it this way will help you discover things that you overlooked or hadn’t thought through completely, and to plan better.

For Years 3-5, just make annual projections—totals expected for each year.

Here Comes the Math

Step 1: Subtract the total Cost of Sales from total Sales, and you will have your Gross Profit.
SalesCost of Sales=Gross Profit\text{Sales}-\text{Cost of Sales}=\text{Gross Profit}

Gross Profit is the amount of money you have available to pay for your Operating Expenses.

Step 2: Subtract your total Operating Expenses from your Gross Profit, and what remains is Net Profit (technically, Net Profit before taxes).
Gross ProfitOperating Expenses=Net Profit\text{Gross Profit}-\text{Operating Expenses}=\text{Net Profit}

(...before taxes 😱😭)

When your Net Profit is positive, you are making money (profit).

⚡Action Step

Fill out your Profit & Loss Statement in our Financial Projections template.

We are currently creating additional instructions and tutorial videos demonstrating exactly how to do this.  Stay on the lookout.

🗂️ Resources

Scroll left-to-right across the table below to view all columns. Click on any item in the leftmost column to open that specific resource page.
Business Plan Core Template
Business PlanBizActually
A no-frills Business Plan template in Google Sheets. (Created by our Team)
Financial Projections
FinancialsCash FlowProfit & LossBalance SheetBreak-EvenBizActually
A Google Sheet to organize and calculate your financial projections. (Created by our Team)

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