Creating a P&L for all products that you sell will ensure the success of your small business. The purpose of a P&L is that it allows you to have visibility into your profitability, costs, opportunities for cost reduction, and better management of your final retail price points.
My favorite P&L template divides your inputs and factors into four sections:
- Retail Price Drivers: Since the retailer that you are selling your product to typically will have a margin requirement to ensure their profitability, the price that you will be selling to them for ultimately determines the final SRP. This is important because in small business marketing, we always want to be ahead of the game and make sure that we price competitively in-market by staying below key thresholds, undercutting or pricing in-line with competition, etc.
- Product Margin Factors: Your product margin is the area in the P&L that allows you to have visibility into the costs that you have control over. For example, the cost to produce is controllable since you can always produce more efficiently, more cheaply (lower quality…not necessarily recommended!), etc. The trade rate is the amount of funding that you want to allocate in market to offer discounts on scans (controllable) for the specific item that you are accruing a trade spend on (via the P&L). The cash discount line is a way to incentivize retailers to order more product (i.e.: if you order a full truckload, I will knock off 2% off invoice). And finally, if you are a food company, your spoils theoretically is a cost of manufacturing since you are over producing for what the market could bear – forcing you to buy back.
- Gross Margin Factors: The inputs that are typically out of your control. For example, pre-negotiated rates if you sell through a broker, distribution costs, warehousing costs, selling expenses, and marketing spends. Marketing spend is the odd ball here since you do have control over this spend. However, at most companies the marketing spend is found below the product margin line since marketing dollars that you accrue don’t necessarily have to be used on the product that you accrued it on. Therefore, removing this line from the product margin line frees up your marketing spend to be spent against any product that you sell.
- Profitability: The bottom line and how we manage to stay in business!
There are many things that I would like to explain to you on this P&L. In particular, two things that I will write about later are:
- How to determine your trade rate and how to offer an EDLP (everyday low price)
- How to improve your profitability while managing the retail price
In the meantime, what questions do you have on P&Ls?