Part 1 | P&L Reports
Lag reports are reports about things that have already happened in your business. These reports are created by gathering facts about your business and calculating what you need to know, based on your income (money that comes into the business) and expenses (money that goes out of the business). They’re mostly used for your accountant’s sake, but it’s still really useful to understand how they work.
There are two main kinds of profit and loss reports (P&L reports), but in this module we only want to talk about one—cash basis accounting reports. This means we’ll only be talking about the cash you have on hand right now. The other kind, accrual accounting reports, are too confusing for now and might give you the wrong impression of what’s going on in your business.
We use P&L reports in our business weekly as a way to keep an eye on things. We think it’s worth taking a lot of time to understand how to read and design this kind of report so that it serves your business. Here’s a short video of Mark describing this report and advice on how to read it.
P&L reports break down the money moving around in your business into these categories:
- Revenue: People use different terms for this, which can be confusing, but it always means the money you make when you sell something. To keep it simple we always use “revenue”.
- Cost of goods (or cost of sales): The money you spend to create or deliver the product or service you sell. This is different from regular monthly costs like internet connections or office space, because those aren’t necessary to actually create or deliver your product. Coaching businesses often don’t have costs of goods at all.
- Gross profit: The total you get when you subtract the cost of goods from the revenue. This is important for those who do have costs of goods, because if helps you figure out if your product is profitable before you worry about other expenses.
- Other expenses: Costs that don’t go directly to creating your product or service. These include payroll, internet connections, and other overheads; usually regular and predictable monthly payments.
- Net income: The total when you subtract your other expenses from your gross profit. This is the final total amount of money that your business makes after all expenses are accounted for.
It’s important to understand that money you put into or take out of your business as the owner is not counted on the P&L, because this doesn’t count as expenses or income. These are called owner contributions (or capital contributions) and owner distributions (or owner draws) respectively.
If you want a more detailed description of this report, you can dive deeper here.