Did you know that your Profit & Loss Report is trying to tell you 7 key things about your handmade or creative business. Do you know what they are and what it’s trying to tell you?
Many business owner’s think that a Profit & Loss Report (or Income Statement) is just a bunch of numbers that are put together for tax purposes and seldom give it more than a passing glance…occasionally. But that’s a big mistake, because it’s WAY more than that.
If you’re having trouble understanding your Profit & Loss Report, it could be that you’re using one of the thousands of FREE Excel bookkeeping spreadsheets that’s available on the web – that just aren’t formatted correctly, or the instructions (where you’re told what goes where) are all wrong.
First, let’s look at a correctly formatted Profit & Loss (shown below) and then we’ll do a deep dive into what goes where and the 7 things your report is trying to tell you and how you can use that information to make sound business decisions.
Now, for the 7 Things your Profit & Loss Report is trying to tell you
1. Income/Total Sales: this is the money you earn by selling your finished items and services minus refunds you give and discounts you offer.
2. MINUS Cost of Goods Sold/Cost of Sales: includes the costs (direct expenses) that go into making your finished items and providing your your services. COGS/COS should include materials, supplies, and labor costs (from outside providers).
3. Equals Gross Profit: this is the money left over after you pay the costs (expenses) of making your finished items and providing your services.
Example: you make crocheted or knitted blankets. You sell each blanket for $200.00 and make/sell 2 blankets per month. Each blanket costs you $125.00 (your Cost of Goods Sold). So, $400.00 ($200.00 x 2) MINUS $250.00 ($125.00 x 2) = $150.00 Gross Profit. This tells you that 1) you aren’t charging enough for that blanket and 2) your paying too much to make that blanket.
4. Minus Overhead Expenses: this is all the costs you pay, EVEN if you aren’t selling anything. Let’s assume that you have $75.00 a month in fixed overhead costs (website hosting, subscriptions, memberships, etc.).
5. Equals Net Income: This is the money you have left AFTER paying out everything.
Continuing with our example: We take the $150.00 (Gross Profit) MINUS the $75.00 (Overhead Expenses) which EQUALS $75.00 NET INCOME. This tells you that:
- You aren’t charging enough for that blanket
- It’s costing you too much to make that blanket
- Your overhead costs are too high
- And bottom line – you need to do a careful review of your pricing and spending
6. Now we ADD in OTHER INCOME (money that we receive that has NOTHING to do with selling our blankets, it’s more like gravy – think Ad Revenue, Affiliate Sales, Sponsored Posts, etc.) and SUBTRACT out OTHER EXPENSES (that have nothing to do with making the blanket or running our business in general – let’s say a tax penalty or the loss on the sale of an Asset). Let’s assume that (on average) you receive $2,000.00 a month in Other Income.
7. Net Profit (or Loss): This is the bottom line amount that the IRS looks at when you prepare your Schedule C and is the amount that taxes will be calculated on. (That’s roughly 33% of this bottom line number)
Let’s continue on with our example: We take the $75.00 (Net Income) and ADD the $2,000.00 (Other Income or the gravy) EQUALS $2,075.00 NET PROFIT (minus the 33% of course for the IRS).
So, all of a sudden you’re thinking Oh baby, I’m really making some good money……….
But are you really? What if that $2,000.00 a month (on average) in Other Income suddenly dried up?
- Where would you be?
- Could you afford to grow your business?
- Could you even afford to pay yourself?
- Didn’t you start your handmade business in order TO make money?
- Is $75.00 per month (minus the 33% for the IRS) really going to have an impact on your finances?
These are the 7 things your Profit & Loss Report is trying to tell you and make you think about.
This is what irks me to know end, when people put out these monthly Income Reports saying “My handmade biz made over $2,000.00 in (month) and you can too! Yes, their Net Profit was $2,075.00 BUT what if that $2,000.00 in Other Income just dried up? What they SHOULD have said is – “My handmade biz had a Net Income of $2.075.00 with $75.00 from the sale of my finished items or services.
The same goes for many of the FREE Excel Bookkeeping spreadsheets that are available on the web – the ones that include the things that are REALLY Other Income up top in the Income section of the Profit & Loss Report.
I know it sounds “knit-picky” but they just aren’t giving you an accurate picture.
- Yes, they mean well.
- Yes, you can and should take the Other Income into consideration when you look at your overall bottom line
BUT in order to make sound business decisions you need to compare the Income you brought in from the sale of your finished items or services with the amount of money you have left after deducting your Cost of Goods Sold and Overhead Expenses.
I know this is a fairly controversial topic. But, I’d like to know how you feel about this subject. Please feel free to leave your thoughts in a comment. I promise, no matter how you feel – I won’t be offended 🙂