Many businesses focus solely on their revenue because that’s the only number they know how to track. They assume that more money must equal more profit, right? Well, that isn’t always the case.

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If I said you could double your profit without receiving another dollar in revenue, would you be interested? What if I also said that increasing your sales through discounting is actually costing you money? This is where your profit and loss (P&L) statement comes in. It is your business scorecard, providing you with a snapshot of your finances and is the best tool to assess the financial health of your business. Let’s look at the simplified P&L chart below to review how small changes can affect your overall profitability.

Total Merchandise Sales	$100,000
Cost of Goods	$50,000
Gross Profit (Total Sales – Cost of Goods)	$50,000
Overhead Expenses	$40,000
Net Profit (Gross Profit – Overhead Expenses)	$10,000

Overview
Typically in a retail business the goal is for cost of goods to account for no more than 50% of revenue and overhead to account for 40%; leaving a profit of 10%. Using the above P&L, if an owner wanted to make $20,000 in profit the following year, then they would focus on doubling their sales. While this is certainly an admirable goal, this shouldn’t be the only course of action. When utilized correctly, the P&L is a blueprint for how to deliver even more profit by evaluating all three categories: revenue, cost of goods, and overhead.

Cost of Goods
Your P&L statement should tell you exactly how much you are spending on the merchandise itself. This is calculated and thought about initially when vendors roll our their new pricing each season, but often gets neglected and forgotten about the remainder of the year. Do you know how much you actually spent when you factor in shipping, one-time discounts, and which individual items were bought at which price points? It can be a nightmare to determine which inventory was purchased before and after the price increase! Fortunately QuickBooks and your accountant should be able to determine that exact cost, and it’s definitely worth knowing. By tracking and negotiating these costs, a decrease of 10% in the above example would give you 50% more profit.

Overhead
This category is the most overlooked, yet is the area over which you have the most control. To review, overhead is the sum of all those expenses outside of cost of goods. This would include big ticket items like rent and payroll, but also all those smaller categories that add up like subscriptions, utilities, and advertising. Keeping a close eye on these, much like in your own personal finances, can reap huge dividends for your business and your bottom line. Shoring up these expenditures by 10-15% can net you 40-60% more profit; without earning a single extra dollar.

Discounts
This is an area that gets a lot of retailers in trouble. They believe that if they offer a 10% discount and just make 10% more revenue that it all evens out. Unfortunately that isn’t the case. Let’s look at the previous example again, but this time with a 10% discount in sales and no increase in revenue.

Total Merchandise Sales	$90,000
Cost of Goods	$50,000
Gross Profit (Total Sales – Cost of Goods)	$40,000
Overhead Expenses	$40,000
Net Profit (Gross Profit – Overhead Expenses)	$0

Yikes! That 10% discount just eliminated all of the profit. The other two categories (cost of goods and overhead) are not affected by any pricing strategy. The cost paid to the manufacturer for the items you sold (cost of goods) as well as your rent, etc. (overhead) are independent of your selling price, so the only area it could affect is your bottom line – net profit. (Note: At times your overhead could be affected by your pricing, but for simplicity sake we are saying the effect was negligible.)

“Well, discounts aren’t given to sell the same number of items as you would have without them,” you say. So now let’s look at an example where you offer a 10% discount and sell 10% more; which is where most business owners believe the break even point would be.

Total Merchandise Sales	$100,000
Cost of Goods	$55,000
Gross Profit (Total Sales – Cost of Goods)	$45,000
Overhead Expenses	$40,000
Net Profit (Gross Profit – Overhead Expenses)	$5,000

Breaking it down: the sales number is the same (10% more = $110,000; -10% discount = $100,000) but the cost of goods went up since you sold more product. This increase in costs resulted in these dollars coming out of your profits. Therefore, if you sold 10% more product with a 10% discount, you actually lost 50% of the profit you would have made had you not offered any discount in the first place. In fact, to earn the same profit as our first example, a 25% increase in sales would be necessary to offset a 10% discount. While discounts can certainly have their utility, this example shows that they should be used sparingly and with caution.

Summary
As you’ve learned, having a solid understanding of your P&L is vital in growing and maintaining a healthy business. It not only shows your current profit, but identifies areas that can lend even more profitability to your business. While receiving this information in a timely manner is crucial, the most important thing is understanding and acting on the insights it provides.

Self Quiz:

1. Are you receiving your P&L statement every month?

2. Do you receive a monthly statement as well as a year-to-date?

3. Is every dollar accounted for and in the correct income/expense category?

4. Can you tell how each department (equipment, travel, teaching, etc.) are doing and the profit from each?

5. Does your accountant review it with you in a way that you understand and are able to act on the information?

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If you are want to partner with someone who understands your business and can help put your numbers to work for you, reach out and schedule a consultation today.