145 Financial Intelligence: Making Friends With Your Profit + Loss Statement

In this episode, where we dig into everything you need to know about profit and loss statements. 

Understanding the numbers and margins that our business generates each month can be intimidating—and understandably so—but we are here to tell you why it is actually incredibly empowering to be aware of your finances. Our profit and loss statements and balance sheets give us valuable incremental information that we use to make decisions each and every month in our company. While P&L statements may seem impenetrable, having a clear understanding of what they are telling us makes it SO much easier to make properly educated decisions moving forward.

We help you understand the different sections of a profit and loss statement, the difference between gross and net profit, as well as the difference between top line and bottom line revenue today. We also get into the logical progression any new business must take, from requiring capital to breaking even and, finally, to generating revenue.

We speak about the side hustle as a strategy to weather during the first few years of starting a business while still earning an income, which helps the prospect seem less intimidating.

Our key message today is that it’s reasonable to build a company that, within a few years, is supporting you and your family. BUT is usually does take some time, so don’t sacrifice this amazing opportunity because it doesn’t happen in the first couple of months!

 

Key Points From This Episode:

•   Why understanding profit and loss (P&L) statements is empowering rather than scary.
•   It is OK to not know everything and ask questions as a business professional.
•   An explanation of why a P&L statement is only ready two weeks in arrears. 
•   The goals and advantages of the P&L statement: price and expense surveillance.
•   P&L statements and balance sheets are the two most valuable monthly financial documents.
•   How revenue is defined in this conversation: not as accrual but cash-based monthly income.
•   The makeup of a P&L statement (‘revenue’, ‘cost of goods’, and ‘other expenses’) explained.
•   A definition of ‘gross profit’ as ‘revenue’ minus ‘cost of goods’.
•   ‘Net profit’ is ‘gross profit’ minus ‘other expenses’.
•   Why having a lot of gross profit rather than a little is vital.
•   The business owner’s salary is not included in a P&L statement.
•   Focus on making money instead of assessing which items money was spent on each month.
•   Earnings are one’s ‘top line revenue’ while savings are one’s ‘bottom line revenue’.
•   Products which generate top line rather than bottom line revenue are risky but lucrative.
•   Starting a business costs money and just breaking even after the first year is good.
•   Understanding reinvestment in relation to growth trajectory.
•   The value of keeping your business as a side hustle for the first few years.
•   Building a successful business is reasonable but just takes time.
•   What makes the bookkeeping tool Bench amazing and how to use it.
•   The brilliance of the analogue/digital mixture of Bench and its new tool called Pulse.

 

Words of Wisdom: 

“Numbers and accounting reports are so avoided, but the truth is that this is the most empowering thing you can do.” 

“You do need to spend money to create a business, period, and in the first year you’re doing well if you break even.”

“It’s absolutely reasonable to build a company that within a few years is supporting you and your family. Don’t sacrifice that amazing opportunity because it doesn’t happen in two months.”

 

Links Mentioned in Today’s Episode:

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