Identifying Profit and Loss
This profit and loss statement is a really nice place to go for to go to when you are uh looking for the profitability of your business as a hole right we talked a lot about product profitability and we did some numbers and some math in conjunction with that and then this is where you will see the profitability of your entire business so this is a really nice report to look at um this is set up his year to date but you could set it up to be um you know all of last year um you could set it up to be just last month just last quarter uh it's kind of up to you whatever is useful to you um so it will show you how things are running what the sort of health and pulse of your businesses currently so the way that I've entered stuff in right now um I've got total expenses of four thousand dollars I've got a gross profit remember that's just how much profit you're making on basically the materials in the production labor uh of your products of thirteen hundred eighty four dollars and a net profit...
of one hundred fifteen um and you actually asked me a really good question after we had a break for the last segment which was how profitable do I need to be right how how much how big does that profit number need to be for each of those product or for your business in general um if you're calculating your profitability er including that freelance rate that we brought into the equation um that freelance rate covers all of your personal and your business expenses so if you make even one dollar profit that should pay for everything that's your break even point right once you hit zero once you go from those negative to positive numbers you should theoretically if they don't change uh be able to cover all of those expenses for your business and for your personal life how much profit you make beyond that is really up to you it's up to uh what goals you have and where you want to be if you don't just want to stay being able to barely cover your expenses and you want to be able to save for retirement safer college safer a house going a vacation have a wedding you know all of those big life things uh that's where you will need to add in the profitability for your business so right now this business is showing a profitability of one hundred fifteen dollars so that's not really me get a knot not really getting me muchmore beyond like a nice dinner right I can cover my business expenses and I can cover my personal expenses and then I can celebrate at the end of the year having done all this book keeping by going out to a nice dinner with my husband um that's about all that will get me, uh, if I wanted to pay for any of those other big expenses, then you would need to work that back in here. Um and in the next thing, we're going to talk about budgeting and how you can set those goals for yourself in order to get to that higher profit number. Um, but I just want to take a look through this a little bit more and so you can see if I'm on lee making one hundred fifteen dollars, worth of net profit where primarily is that coming from? Um, my gross profit whoops. My gross profit is twelve hundred dollars higher than that. So, um, even though my gross profit is not huge, I could still save twelve hundred dollars in the other expenses for running my business. So are there any places that I could cut back here? Um, legal and professional services insurance, home office advertising and promotion that's maybe a big ish one. Maybe I could see if I could get that down a little bit. Um mostly it looks like it's my cost of good soul that cost a lot. Um it's my inventory purchases my materials and supplies a little bit of production labor so it looks like in comparison to my profit, my inventory purchases are pretty high so what that means is I'm not pricing high enough to give myself enough of a profit between the cost of my goods and the sale of my goods. This is sort of my biggest area of concern. Um, so I either need to figure out how to get those inventory costs down, maybe I buy in bigger bulk, so it's less per piece, uh, or I need to start looking at my pricing either it's not high enough or it's in the wrong market. Um, but my profit margin here is very slim, so that's, where we need to pay a lot of attention. Um, the other area, of course, is income if we look here, maybe it's not my cost of goods sold that's the problem because, uh, my sales of products are actually pretty slim um, maybe it's the sales of my goods, right? Maybe that's my problem? Because what I'm doing right now is I'm paying for all of my inventory with consulting work, I'm not actually selling my inventory, all of my income is coming from outside sources, so even though I'm profitable, what I'm profiting on, what I'm making all my money on is consulting I'm not actually selling any of the toys that I've just bought, in which case I really need to pay attention to my sales um I either need to start doing a lot more marketing, in which case I need to bump up the marketing budget, not reduce it uh maybe it means that I need to hire a sales rep uh because even though they will take a cut of everything, they will get those sales moving, they'll get it out the door they'll start getting those wholesale accounts in um or maybe a distributor or um it means that I need to start transitioning my business if I like doing that into more of a service side business, maybe it's not the product side of my business that's really profitable and if I can, um as sort of was the case in my own practice um if what I really like is designing the new products and making the new things, then maybe what I don't want to be spending all my time doing is selling toys that other people have made thousands and thousands and thousands of them two stores around the country and trying to get that rolling. Maybe I want to spend my time making individual product or props for clients like for, um publishers and magazines and television shows and movies and that sort of thing. Um so this is another way to look at the profitability of your businesses a hole if you've established that your products themselves are profitable and your business isn't really this is the report that you can look to for answers why, um it's a lack of sales or marketing? Um, it's the wrong line of work that your inner it's the wrong way that you're spending your time um, it's some sort of administrative expense, you know, like we mentioned the studio. Maybe your studio rent is the huge expense here. Maybe you need to cut that down by moving to a smaller studio or sharing with somebody. Um, home office that's probably not someplace that you can cut back too much. Um, given that you also live there. Uh, but you know, if you're always leaving the lights on in your utility bill is really high stop doing that. There are ways to get this down a little bit too. Or maybe you're, um maybe the insurance on your apartment is really high. Your renters insurance or your homeowner's insurance shop around get cheaper insurance. Um, you know these air, all all things that you can look at when you're looking at your bottom line and that's why they call this the bottom line, right? This is the bottom line of your, uh, of your report. The bottom line of your profit and loss report is your net profit literally uh that's why they call it that so yeah, if you would rather go on a vacation than go out to a nice dinner this is where you would look to figure out what changes you need to start making in order to get there um all right, so I think we're going to take, uh, a little bit of a break unless there are questions about this and broader company profitability either from folks here in the studio or out in the broader wide world and then in the next segment we're going to look at budgeting and cash flow so we'll look at those reports that don't just show you the past or the present we're going to look at those reports that show you the future and how you can, uh set things up tio um reach the goals that you said and make sure that you have the money to do that we do have a couple of questions in a way had a view just said their office leans some sort of sewing business said they got fabric thread except with a purchase to make products she thought that was there in inventory but if not, how does she treat that the taxes so it's part of uh the cost of goods sold um it is part of the materials and supplies within that cost of goods sold so it's still uh tax deductible um because it is a business expense um if those things have been made into finished products, then that would be inventory um if there's still just sitting around a supplies and it's not really inventory um as faras like the deductibility of things and, uh, the legality of how you categorize that for tax purposes, I would really recommend talking to a c p a about that I don't want to make any specific recommendations about what's legal or not legal to deduct on your tax return. Um but for the purposes of this, uh, I would treat any materials supply's as materials and supplies until they become actual inventory products until they've become assembled, um and that's the way that we're tracking them I mean it's still cost of goods sold so it's still tax deductible? Um, yeah, I just wouldn't treated his inventory at myself. Thanks. Andi teasdale is asking about reconcile ing purchases made in foreign currency. They they do business with canada, for example admit purchasing on their credit cards. Do you just take the value that appears on the statement you need to put a crew for any sort of bank charges except on where would you put those? Oh, that's a good question. S o I would put in the amount that's on the statement because it's the banks that will determine based on the exchange rate for that day how much is deposited in your account than in us dollars or whatever currency it is that you're working with at home and then any um conversion fees would be added into that miscellaneous expenses uh chart of account that line item uh for that covers any kind of bank fees um if you want you can and you get a lot of these and you want to track them like I said, the chart of accounts is a flexible document and I put together a sample chart of accounts for crafters but if you do a lot of international commerce and you have a lot of fees associated with converting currency then you khun create your own account your own line item that just tracks those fees as their own separate thing they don't need to be a miscellaneous expense they khun b currency conversion fees and then you can see how much money you're spending every year on that in particular uh and if that's affecting your bottom line then you could make some decisions around that too in particular you know you can do uh less international commerce if it's really expensive or you can increase your prices to account for that um you know, there are all kinds of ways to sort of solve that you khun bulk things into uh bigger shipments you can start having minimums for international commerce yes, we will sell to foreign countries um as long as you know there's either a feat of x number of dollars added or you meet a minimum purchase requirement uh sort of account for that um yeah so I I hope that answers the currency conversion question I think it is just a couple of others s sparrow in flight says if you buy your materials on sale do you change your price point to reflect that or is it that just makes more profit for yourself? I wouldn't change my price point teo uh to account for that because in that case you would be lowering your price point and as we talked about uh as we will talk about in the pricing segment pricing is a marketing tool among other things that creates an impression for buyers about the value of a product um so I wouldn't go ahead and you know, uh lower the price of your product to account for that um sales are often uh also fleeting something's not going to stay on sale forever and then you would have to raise that price back up again. Um so I I would more likely recommend that you figure out what the price uh should be based on your product profitability and what the materials typically cost and then if it's on sale great you got a deal you got a little extra profit what's wrong with that that's that's lovely that sounds good to me too now this is slightly off topic for this segment, but I'm going to ask it because twenty four viewers have actually voted on this question was posed by jesse katz jessie's asking how would you price something like greeting cards where illustration and graphic design work takes up the majority of ours for the item but then the item is reproduced multiple times a ll those illustration designed as part of product development or do they directly apply to pricing the item? That's a really good question so if we're looking at it in terms and again we're going to cover pricing in a future segment um but if we're looking at it in terms of that product profitability calculator um I'm going to bring that back up again just so we have a little visual to go along with it so if you have a um a greeting card let's go well can we go back all the way? Way no, no, no stay here please come on itself supposed to take me back there we go. Great. All right, so let's do this again really quickly if we've got a greeting card and most of it is your your illustration time um and this will apply sort of to the digital products to which will also cover in a future segment um if most of this is illustration, time and let's say it took you twenty hours to illustrate and you're freelance rate is uh we'll just use mine fifty seven dollars an hour or whatever it is um hope this is minutes ha ha just kidding uh, it's twelve hundred minutes uh your labor cost comes out too uh eleven hundred and forty dollars and like I talked about with the digital products you're gonna have to then back into a price based on the number of these that you think you will reasonably cell um so this becomes a little bit trickier but it's helpful to see because it lets you see how many you would have to sell in order to profit off of this right? So if it's going to cost you eleven hundred forty dollars uh to illustrate a greeting card and this applies to of course art prints and whatnot as well which I think you were also asking me about earlier um you have to see how many of these you will have to sell in order to make that profit. So if your materials cost then for the's cards is let's say um a dollar fifty then in order to make a profit off of your cards um you would need to sell them at a price and in an amount that covers that so let's say you're selling them at four dollars per and actually you would more likely be selling these at like if you're selling them wholesale you'd probably sell it more likely to two fifty per wholesale price um so that leaves you minus your materials with a gross profit remember we talked about gross profit that would leave you with a gross profit of a dollar so in order to profit off of your illustration then you would need to sell eleven hundred forty of these cards uh if that makes sense so when you're doing something like this where you're looking at um ah lot of labor upfront but then an unknown production run that typically you don't do yourself you hire out for someone to print your greeting cards or um you would hire out for someone to make your art prints umm of course if you're printing them yourself as well, if you're like screen printing t shirts and you're doing the design of the t shirt and you're also doing the screen printing then you have to add your production labor into this too um and then your gross profit is your materials plus, uh your production labor right? We talked about that before gross profit is equal to your materials plus your labor groups plus production labor so let thinks I'm making an equation because they were the equal sign equals materials plus production labor so if it also takes you two minutes to print each card let's, get rid of this. Just for clarity's sake. That labor cost is a dollar ninety. So then you've got a dollar fifty and materials plus a dollar ninety in labor for each card. Um, and now already we've run into an area where we're not profitable anymore. Let's, lower these material costs. Um, let's, say your material costs or twenty cents, and it only takes you one minute to print each card. Now, your labor cost is ninety five cents. Ok, so you've got a dollar fifteen and cost you sell it for two fifty wholesale, which leaves you with a dollar thirty five and then, uh eleven hundred forty dollars divided by a buck thirty five. You need to sell eight hundred and forty four of those. If you're making them yourself in order to reach that profit that break even profit, if you want to make more money off of them, you have to add dollars to that eleven hundred forty total. That makes sense. I know that was a lot of math really fast in a lot of different places. Health. This spreadsheet. Um but I hope that that, uh, clarifies some things for people I think it doesn't that that really electrified the chat rooms they're really interested to see that answers say twenty four people wanted that question answering, so thank you for posting it just okay, thanks for the really good answer. Another very popular question came in from one of our viewers are saying they're an artist, so they make one ofthe original work and they just don't time themselves, they have no idea, you know, they just work until it's finished, so they don't want to, you know, they've never worked out how much paint they've used, how much time it's taken etcetera, is there a very simple way to keep their accounts in order? Um, you know, using a bad minimum sort of average time, I mean, how how well do they do? Do they have to go through the effort of actually time in themselves? I would suggest going through the effort of timing themselves, I would suggest actually taking the time to see how much paint that they're using on a campus on average, I mean, it doesn't have to be, um, you know, you don't have to time or measure every single painting that you do, um, but if you ever if you find that you're not profitable, um and you want to know why the only way is to actually start tracking it? Uh, the only way to make changes is to have the information and so if you don't actually, um keep track of that um there's really no, nothing else you can look, teo, there isn't really a simple way uh, to figure that out. Um, you know, if you're if you're charging enough for paintings already such that at the end of the year, you already you know, you know, you're taking home one hundred thousand dollars in profit than clear that your pricing things correctly, your accounting for your labor correctly and everything is going swimmingly. That's fine. Um but I sort of assumed that most people are taking this class because they're not walking away with one hundred thousand dollars at the end of every year with no effort. Um, so this is a really good way, uh, to find out exactly you know where your costs are and certainly with original one offs. Uh, your own, uh, time is going to be the bulk of that. Um, so, yeah, I wouldn't say that there's really easy way out of that, but there are, um, really helpful tools out there that you can use to make that simpler um, there are lots of really uh easy timing apse for example so if you always have your phone in your studio with you you just hit start when you start painting you hit stop when you're done when you go in the next day or when you go in after lunch she hit start you hit stop and then the painting is done it will add up all that time for you and it will show you you spent twenty three hours and forty seven minutes on this painting um and then you've got that time so you know there there are ways to make that sort of thing a little bit simpler so that you don't have to do so much uh legwork on your end but if you want to know how much to charge appropriately for commissions and large works um especially if you know that uh gallery or an agent is going to take half of that right off the top um then it really is important to account for your time um and of course you can always go above and beyond that break even point if you get to a point where you're doing those calculations and you feel like actually that the total cost for that painting came out toe less than I thought that's fine and that's great if the market will bear a higher price than what your cost is already fabulous um and if it meets your goals great if not then it may be time to bump that up or find a different market or um you know, start doing some of those things where you turn your original works into prince into multiples that you can sell with a much higher profit margin where you still get to spend the bulk of your time doing those paintings and making that work that you love um but then have the bulk of your income and your profit coming from those alternate revenue streams coming from those alternate product lines like the quilter who wants to make those couture quilts but maybe you just do that once in a while and when you've made a beautiful one then you change it the colors and you send that designed to be outsourced as your less expensive line of quilts that more people can afford and gets you more profit right um so yeah becomes difference between actually are you painting for business or are you painting is a hobby where you just sell some paintings it's yeah that's that's the difference but thank you for the question absolutely appreciate people ask now in the next segment coming up now we've dealt with positive on reconciliations began talking about balance sheet budgets and cash flows tell us about that long yes so we've um well we've already covered the balance sheet but we're going to talk about budgets and cash flows um which are those future reports so uh this profit and loss statement that we looked at uh that's that's a report for the past right that shows you everything you've spent on everything you've made in the past for a certain period of time your balance sheet shows you the present how much cash you have in each of those accounts at the present moment that you can work with and after the break we're going to look at budgets and cash flows which show you the future how are you doing in your business compared tio uh what your goals are for the future how are you tracking against those goals? Are you hitting them? Are you falling short in which areas and also the cash flow forecast uh which shows you where you can expect your high and low periods of cash availability to be so that you can plan that when you're making purchases um and getting income and how you can sort of smooth that out in order to figure out ways teo make things a little more, uh predictable, right? It would be really nice eventually to have a business where you know that you could pay yourself x amount every month as a salary um and not have to worry about well right before the holidays I'm gonna have a ton of money and then in february and march I'm gonna have very little um so yeah, we're gonna look at the future