The profit and loss statement (also known as the "income statement" or P&L) is the most common of the standard financial reports that bankers and investors will expect to see in your business plan. The P&L statement in LivePlan shows your revenue, your expenses, and the difference between the two — that is, your net profit or "bottom line." The P&L is a fundamental tool for understanding how the revenue and expenses of your business stack up. At a glance, it can tell you if your business is profitable or not.
How to read the profit and loss statement
To locate the profit and loss statement (P&L) in LivePlan, click on the Forecast tab and then Profit & Loss:
Here's a quick line-by-line explanation of the P&L:
Revenue: The top line of the P&L is the money that you have coming in from sales (before any deductions). In a sense, the top line of your income statement is just as important as the bottom line (net profit); all of the direct costs and expenses will be taken out of this beginning number. The smaller your revenue number is, the smaller your expenses need to be if you’re going to stay in the black.
Direct Costs: Also referred to as the Cost of Goods Sold (COGS), these are the costs that go into making your products or delivering services. You wouldn’t include items such as rent for an office space in this area, but you would include the things that directly contribute to the product you sell. For example, to a bookstore, the direct cost of sales is what the store paid for the books it sold; but for a publisher, direct costs include authors’ royalties, printing, paper, and ink. If you only sell services, it’s possible that you have no direct costs, or very low direct costs as percentage of sales; but direct costs of transportation include fuel and crews, and even accountants and attorneys have costs for subcontractors, research, and photocopying.
Gross Margin: Gross margin (or gross profit) is the difference between the revenue and direct costs on your P&L. Gross margin tells you two important things: how much of your revenue is being funneled into direct costs (less is better) and how much you have left over for all of the company’s other expenses. If your gross margin is smaller than the amount you need to cover your expenses, you’re not going to be profitable.
Operating Expenses: Operating expenses are a list all of your expenses, excluding your costs of goods sold. This includes everything your company pays for to keep the doors open: rent, payroll, utilities, marketing, etc. Remember that each individual purchase doesn’t need its own line item. For ease of reading, it’s better to group things together into categories of expenses.
Operating Income: Operating Income is also referred to as EBITDA, or earnings before interest, taxes, depreciation, and amortization. This is a line item to keep your eye on, especially if you’re presenting to investors.
Interest Expense: Here you'll see any interest payments that your company is making on its loans.
Income Taxes: This will reflect the income tax amount that has been paid, or the amount that you expect to pay.
Depreciation and Amortization: These are expenses associated with your assets, both tangible and intangible. Over time, tangible assets lose their value, or depreciate. After several years, the tangible asset will be worth less. With intangible assets (like copyrights or patents) on the other hand, value doesn’t arrive all at once, so it is amortized, or distributed, over several months or years.
Total Expenses: Total expenses takes into account all of the expense items in the P&L. This total includes your Direct Costs, Operating Expenses, Interest Expense, Income Taxes, and Depreciation & Amortization.
Net Profit: Net profit, also referred to as net income or net earnings, is the proverbial "bottom line." Remember that this number started at the top line, with your revenue from sales. Then everything else was subtracted from that initial sum. If this number is negative, you’ll know that you’re running at a loss. Either your expenses are too high, your revenue is in a slump, or both—and it might be time to reevaluate your strategy.
Adjusting numbers in the profit and loss statement
If there is at least one item in a specific category of the P&L, an expand/collapse arrow will be available. Clicking that will allow you to see all of the items under the parent category. To adjust the numbers on the P&L., just click on any of the blue links for revenue streams, direct costs, direct labor, or expenses:
This will open the appropriate overlay and allow you to directly edit the numbers related to that item.
Adding revenue, expenses, etc. from the profit and loss statement
In addition to being able to edit existing items in the P&L, you can add revenue streams, direct costs, personnel, or expenses from the statement. To do this, just click the appropriate button below the P&L:
This will open the appropriate overlay for that item:
Just follow the steps in the overlay to add the item.