Customizing Your Profit and Loss Statement to Improve Financial Outcomes (Part 2)
Customizing your Profit and Loss Statement puts meaningful financial information AT your fingertips.
Many think that financials reports like the Profit and Loss Statement are strictly for tax purposes, but they are actually valuable business tools.
The key to making the most of these reports is to customize them to your business.
financial reports should provide value to you, and help you make key strategy + business decisions.
If your Profit + Loss, or Income Statement, isn't providing you with meaningful and valuable information about your food business (without having to do side calculations or dig for additional data) you're working with what I call "Basic" financial reports in need of a revamp.
In the last post, I described the types of information your report should be providing, and how to know if your Profit and Loss Statement needs a revamp. This week we’re discussing Cost of Goods Sold.
Signs that the cost of goods Section
of your P&L Needs a Revamp
Sign #1: All of your COGS are lumped into a Single Cost Category called “Cost of Goods Sold”.
Sign #2: The COGS section is super detailed. This might look like individual ingredient or packaging costs being listed separately rather than grouped together.
In all sections of your Profit & Loss report you want to strike a balance to achieve what I call meaningful detail, or said in another way, just enough detail to provide you with valuable information to make decisions. Too much detail can hinder your ability to gain valuable insights from your financials.
Steps to Take to Revamp Your
Cost of goods sold section
COGS are the most nuanced section of a P&L, and truly will be different for every business.
So, think through what “inputs” go into creating and delivering your product and list them out.
Then, categorize each of the inputs.
Here are some common examples of COGS categories:
Ingredients
Packaging
Production Labor or Co-packer fees
Freight (cost to get inputs delivered to you)
Shipping Material Costs
Shipping Costs
Market / Event Fees
Sales Commissions
This is not an exhaustive list, but it is pretty extensive and many businesses won’t have this many categories.
The goal here is to have a list that will allow you to easily see a change in a category that could hurt or benefit your business. For example, tracking ingredient costs separately from packaging allows you to see if one category of spending goes up, or is having a large impact on the costs to produce your product. When you see this you can make strategic decisions about buying items in that category to bring costs down, or increase prices to cover the cost increase.
how to implement these changes
I recommend working through this and the remaining section of your Profit and Loss Statement, Operating Expenses, before implementing any changes. This is the most streamlined way to make changes on your own, or communicate them to a bookkeeper if you work with one.
Ready for more? I’ll share the signs that your Operating Expense section needs a revamp and customizations next week.