Demystifying Your Profit & Loss Statement — A Guide For Franchisees

The pursuing excerpt is from franchise maestro Mark Siebert's book The Multiplier Model. Buy it now.

When I clasp exploratory meetings pinch clients, I typically inquire astir various items connected nan profit and nonaccomplishment (P&L) — too called an income relationship — without really referring to nan archive itself. I'll usually inquire astir nan costs of instrumentality sold, their labor, aliases immoderate different charge.

Here's really nan responses tin drastically differ: Type A" business owners usually springiness maine a very circumstantial number — often down to nan decimal point. "Type B" owners usually springiness maine a scope — sometimes constrictive and sometimes not. "Type C" owners whitethorn simply springiness maine a shrug. So wherever do you autumn connected nan list?

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The components of your income statement

The P&L is fundamentally room into 3 parts:

• Revenue (sales)
• Expenses (costs)
• Profits aliases losses (In different words: income, which equals gross minus expenses.)

Essentially, a P&L tin thief you understand respective important principles that you should grasp from nan commencement of opening your business.

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Understanding your imaginable revenue

On nan gross side, you petition to understand really you will make sales. You should inquire yourself immoderate basic, yet important, questions.

• Do you expect repetition customers?
• Will you discarded add-ons?
• Will location beryllium a rank component?
• Will your gross move complete time?
• Will you tally into capacity issues?

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Diving into your expenses

On nan expenses side, it's important to understand nan narration betwixt your fixed expenses and your adaptable expenses.

• Fixed expenses correspond nan costs you'll personification each month, sloppy of whether you make a sale. Your rent and nan salaries you net portion are bully examples of fixed expenses.
• Variable expenses correspond nan costs you only incur pinch a sale. By subtracting your adaptable expenses from your trading price, you get your publication per sale.

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Start making calculations

Once you grasp fixed and adaptable expenses, you tin cipher a hypothetical break-even constituent for your business by making definite assumptions astir pricing and adaptable costs.

Simply disagreement your fixed expenses by your publication per sale, and you tin get a amended thought of really galore income you'll petition to make to break even.

If you want to execute a definite level of profitability, adhd that profit to your fixed expenses and recalculate. Then you'll cognize what level of income you'll petition to execute to get there.

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The complexity of income statements

The immense mostly of businesses don't discarded conscionable 1 merchandise aliases service. Plus, each merchandise aliases activity will personification its ain associated price. And nan worth for each merchandise aliases activity will not personification a accordant separator either.

For example, return a fast-food restaurant, wherever you tin bargain a burger for $1 and a ample soft information for $1.50. You tin easy spot that nan costs of different products is not accordant crossed each merchandise sold. So nan "product" you discarded and nan "price" of that merchandise will dangle connected your merchandise mix, and perchance connected worthy pricing aliases discounting arsenic well.

Then location are labour costs. In immoderate businesses, wherever labour is hired connected an as-needed crushed to complete a job, accumulation labour is each a adaptable cost. In different businesses, immoderate labour functions are overhead and immoderate whitethorn beryllium partially overhead and partially variable.

Again, utilizing a food-service cognition arsenic an example, during nan slowest times of each shift, you tin ne'er personification less than 1 worker successful an unfastened restaurant. But you will petition to summation your staffing to meet your activity requirements astatine different parts of nan day, connected different days of nan week, aliases moreover depending connected different upwind patterns. So while you will dainty edifice labour arsenic a adaptable cost, astatine slightest immoderate accusation of it is fundamentally "fixed."

Once you commencement to narration for immoderate of nan minutiae — for illustration successful installments insubstantial processing fees aliases shipping and handling costs — a "simple" income relationship becomes overmuch overmuch complex.

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Take your time

This whitethorn sound incredibly daunting if you haven't done it earlier — but erstwhile you get utilized to it, nan process becomes 2nd nature. And erstwhile that comfortableness sets in, you'll beryllium bully connected your measurement to moving a profitable business and making day-to-day decisions to amended aliases solidify your bottommost line.