What is… A Profit and Loss (P&L) Statement

Every business needs a way to see how they are doing. How many sales they are bringing in, what they are making on those sales, and what is left over after all the expenses and bills are paid. For most, this ‘scorecard’ is a profit and loss statement (P&L). 

Here is how Investopedia defines a P&L:

The term profit and loss (P&L) statement refers to a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period, usually a quarter or fiscal year. These records provide information about a company's ability or inability to generate profit by increasing revenue, reducing costs, or both. These statements are often presented on a cash or accrual basis.

In a typical retail business, you will have a P&L for each month of operation. This will summarize your location’s sales, margin, expenses, and ultimately, your profit. What goes into these financial statements may vary somewhat from company to company, but in some form, those key sections will exist to give you insights about the performance of your business. Let’s take a look at those key sections a little further.

Sales or Income

This will tie to the income your location generates through the register or orders fulfilled by your store. Depending on your exact business model, this can be sales generated from customers shopping inside of your specific store location, or it could come from online orders that are fulfilled by the location. This could be from Buy Online Pickup In Store Orders, Curbside Orders, or delivery orders sent directly from your location. The sales or income on your P&L will tally all of that at the retail amount that customers actually pay. Usually, any discounts, coupons, or promotions will be shown on a separate line. It could come in the form of a margin reduction (see below) or a separate line in the income area that shows the reduction provided by the coupon or discount. That would result in Net Sales (total sales less any discounts).

Margin

The Margin or Gross Margin section of a P&L will reflect the amount of money or income that is generated after all the costs associated with the products sold (Cost of Goods Sold or COGS) are calculated. This is typically the actual amount paid for the product, not the labor, freight, or other expenses associated with selling the product (see expenses below). If your business purchases a widget for $5.00 (cost) and sells it for $10.00 (retail), then the margin, in dollars, is $5.00. Most P&Ls will also show the margin as percentages of sales, commonly referred to as margin (or gross margin) rate. Gross margin rate can be calculated by taking sales less cost and dividing by sales. 

Expenses

The expense area of the P&L is used to reflect all other costs that are incurred in the running of the business. This may include your payroll or labor costs, including all associated benefits. It will include your rent for your location, any marketing dollars spent to promote your business, any travel expense, freight costs to get products to your location, and supplies that are used for the day-to-day operations. You may also have other real estate costs associated with your location, as well as administrative costs associated with supporting the entirety of the company. The exact expense lines can vary from business to business. Usually, your rent, payroll, and marketing will be the most significant expense lines of the P&L. Labor and marketing are also two of the most controllable on a short-term basis. While you may not specifically control the marketing budget for your location, it is something that can be impacted in relative real time. And I am sure everyone is aware that payroll is a topic that comes up frequently in how you control that at your location’s level. The schedule you write and the amount you pay to your associates immediately impact the payroll line on your P&L.

Profit

The final area of the P&L is the profit. That is the amount left over after all the reductions are made. You take your sales and subtract the cost of goods sold to give you gross margin. From that, you subtract out the expenses associated with your business, and that will leave you with your profit. This may be referred to as gross profit or even Earnings Before Interest Taxes Depreciation and Amortization (EBITDA). Meaning, there are still some other expense or cost factors that may be associated with the overall business. We won’t dive into those today, but understand at an individual location level what you see as profit may not be the final number when factored in at an enterprise level. Many businesses will tie their Store Managers and other members of the team to the P&L statement for purposes of bonuses or performance discussions. Understanding how you go from your top-line sales to the profit line becomes an important knowledge base for any leader in every type of retail business.

Hopefully, this provides some additional insight into how your profit and loss statement works at a high level. How any business compiles their P&L statement can vary, but it should have these major components. Some areas may be simplified for the purposes of measuring performance at the store, but they will generally follow the four sections I mentioned above. If you have additional questions about how the P&L works for your store, I would encourage you to reach out to your supervisor to ask additional questions. 

I would also love to hear any questions you may have about measuring sales or profit performance. They could be a great topic for a future ‘What is…” article or a part of the FAQ series I share once a month.

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