From P&Ls to Net Profits
A Recap of Commonly Used Financial Terms
The Tru Vue® Retail Bootcamp winners, Rene’ and Larry Bauer from Karon’s Frame Center in Port Angeles, WA, worked with Ken on an operational and financial consultation. During the bootcamp, Ken assessed the shop’s profit performance and made recommendations for improvement. This post is the first in a series inspired by the Retail Bootcamp. To help you put on your accounting hat, we begin with an overview of definitions of common financial terms used throughout the series.
I have worked with hundreds of framers over the years, but working with the owners of Karon’s Frame Center, Rene’ and Larry Bauer, was an interesting project for me. Typically, I am called in to help custom frame shops strengthen their financial performance. In the case of Karon’s Frame Center, there were many things Rene’ and Larry were doing very well, but this is what has made it such an interesting shop to dig in and analyze. It is always easy to assist a shop that has many areas of improvement, but with Karon’s Frame Center I had to investigate and find areas of improvement where they were already doing quite well.
Language of Profitability
Part of understanding financial performance, even when it is strong, is knowing and using the language of profitability. Given that the main topic of our next few posts is focused on finance, below are some key terms and phrases any small business owner should understand:
- Sales Revenue is the amount of income that you receive from the sale of your products and services in a particular period of time.
- Operating Expenses are all of those expenses necessary to running your business, such as rent, salary, and utilities. Many of these operating expenses are fixed, but others are variable based on the types and volume of projects you are doing. Others are discretionary, such as salaries.
- Cost of Goods Sold is the accumulated total of all costs used to create a product or service, which has been sold. These costs fall into the general sub-categories of direct labor, materials, and overhead.
- Gross Profit and Gross Margin are essentially the same but gross profit is stated in dollars and gross margin is stated as a percentage. For example, the calculation to generate gross profit is revenue – the cost of goods sold. Let’s say a company has $100,000 in sales and spends $30,000 on materials, their gross profit is $70,000 (100,000- 3000 = 70,000). But their Gross margin is 70% ($100,000 – $30,000 / $100,000= .70).
- Net Profit is defined as the money left over from gross profit after expenses such as taxes, interest, etc., are paid.
- P&L (Profit & Loss) or Operating Statement is a statement that shows information about a company’s ability, or lack thereof, to generate profit by increasing revenue, reducing costs, or both. A P&L statement, gives you access to see the health of your business at any point over any period (monthly, quarterly, yearly, etc.). The P&L is an important financial document that a company earns from the sale of its products and services, before the deduction of the company’s cost of goods sold (any selling and administrative expenses). You generate this percentage by taking a company’s total sales revenue minus its cost of goods sold (COGS), divided by total sales revenue.
As custom framers, we resell materials in the form of a completed project. To avoid confusion, we’ll use the following terms throughout the series to represent the materials purchased by custom framers for use in projects and the finished project sold to customers.
- List cost is the cost (to the framer) of materials used to complete a framing project, such as moulding, mat board, glazing, etc.
- Sell price is the price of a completed project sold to a customer.
I hope these definitions provide some clarity for when it’s time to review your financial performance.