THE MEANING OF P&L (ENGLISH VERSION)

P&L		Jan	Feb	Mar
Sales		3,000	3,036	3,040
	Volume	2,000	2,200	1,900
	Price (Average)	1.50	1.38	1.60
Factory Costs		1,650	1,763	1,619
	Raw Material	1,000.00	1,100.00	950.00
	Labor	500.00	500.00	500.00
	Electricity	50.00	53.00	49.00
	Maintenance	100.00	110.00	120.00
Gross Margin		1,350	1,273	1,421
	% of Sales	45%	42%	47%
Administrative Costs		850	860	860
	Sales Force	500.00	510.00	510.00
	Advertising	100.00	100.00	100.00
	Staff	250.00	250.00	250.00
Net Income		500	413	561
	% of Sales	17%	14%	18%

I remember, some years ago, when a worksheet like the one above was shown to us in the financial management class in MBA school. General astonishment! The truth is that the marketer is often not used to dealing with numbers, and when it's really needed, the shock is unavoidable.

The spreadsheet above is the famous P & L spreadsheet, and means "Profits & Losses". This is a report that states the financial health of a product, product line, department, or even a company as a whole (for this article, we will use the generic term "business unit").

With this report, it is possible to know what is selling, administrative expenses, costs, investments and everything else that may impact the business unit profitability.

In order to better analyze the expenses, we must understand the P&L structure, which is based on three interlinked pillars: Sales, Cost and Profit. When a business unit sell its products and take down your costs, have your profit. This is the beginning of the P & L.

The calculation below may seem simple (and it really is), but is crucial for managing the P & L. We can see, from its analysis, there are two ways to increase profit: increase sales or decrease costs.

Sales (eg: $3,000)

-

Cost (eg: $1,650)

=

Gross Margin (eg: $1,350)

By "Sales", we should consider all direct revenues (Local Sales, Export and Public Bids) from its activity, always indicated in monetary value. This value is found by multiplying the total volume (units) and the selling price. Changing our formula, we get:

Volume in units (2,000) * Price ($1.50) = $3.000

-

Cost ($1,650)

=

Gross Margin ($1,350)

The "cost" should be understood as all costs related to the manufacturing activity. It needs to consider only costs directly related to manufacturing, as raw material, Labor, electricity, maintenance, and others. Do not include costs not related to manufacturing (such as advertising, for example). Our formula, then, shows these costs:

Volume in units (2,000) * Price ($1.50) = $3,000

-

Raw Material ($1,000) + Labor ($500) + Electricity ($50) + Maintenance ($100) + Other factory costs = $1,650

=

Gross Margin ($1,350)

Thus, we have the "Gross Margin" (also called "gross profit") being generated from the subtraction of various elements. Use the Gross Margin to pay investments, Sales Force salaries, Staff salaries, and others. In order to facilitate the analisys, we can put the same equation like below:

P&L		Jan
Total Sales		3,000
	Volume	2,000
	Price (Average)	1.50
Factory Costs		1,650
	Raw Materials	1,000
	Labor	500
	Electricity	50
	Maintenance	100
Gross Margin		1.350

Like you can see, our spreadsheet is getting the same way as the P&L. From this point on, we need to include costs not related to manufacturing, like investments in advertising, sales, logistics, engineering, legal, purchasing, etc.. All these costs will be charged from Gross Margin. After all charged, the full P & L is completed as follows:

P&L		Jan	Feb	Mar
Sales		3,000	3,036	3,040
	Volume	2,000	2,200	1,900
	Price (Average)	1.50	1.38	1.60
Factory Costs		1,650	1,763	1,619
	Raw Material	1,000.00	1,100.00	950.00
	Labor	500.00	500.00	500.00
	Electricity	50.00	53.00	49.00
	Maintenance	100.00	110.00	120.00
Gross Margin		1,350	1,273	1,421
	% of Sales	45%	42%	47%
Administrative Costs		850	860	860
	Sales Force	500.00	510.00	510.00
	Advertising	100.00	100.00	100.00
	Staff	250.00	250.00	250.00
Net Income		500	413	561
	% of Sales	17%	14%	18%

 

There are many variables to be addressed when managing P & L, but a good understanding of its structure helps in identifying opportunities. We can list several examples of using the P & L for planning activities and strategies, however you, dear reader, may remember any situation that occurred with you when you were managing results, right? Share your experience with us!

Best Regards,

Luiz Teixeira