LET’S GET STARTED
One of the best ways to get visibility of the financial performance of your startup is by tracking your profit and loss metrics. Using key financial metrics within your P&L reports can give you a view of the overall health of your business, as well as an understanding of your working capital.
This piece will explain why a profit and loss report is so important and the 3 of the most important metrics you need to always keep an eye on.
The Importance of Profit and Loss Reports
Profit and Loss metrics are a key part of any financial report and serve as the most immediate way to determine the financial performance of your business. This isn’t important just for judging your business performance and working capital at a single moment, but also to plot out trends and guess at future business performance.
A CFO consultant can also investigate profit and loss metrics to make recommendations on how to improve financial performance and operating cash flow. You can also gauge the success of your business within the competitive landscape by comparing them to the key financial metrics of other competitors in your space.
Not only are profit and loss metrics important for your business planning, but any investors you talk to will want to take a look at these key financial metrics to judge your business performance. Having net working capital KPIs and other profit metrics on hand can help you look good in front of the investors!
Three Key P&L Metrics
There are a variety of profit and loss metrics for startups that you can measure - if you’re getting started, the following three are among the most important key financial metrics to record.
Many sheets of cash KPIs will start with gross profit. This is a pretty simple profit and loss metric to understand. Your company will have its net sale revenue - the amount of money it gains from its operations. It will also have “cost of goods sold”, or expenditures per every unit or service sold. Subtract the expenditures from the profits and there’s your Gross Profit.
Gross profit is a good place to start when it comes to cash KPIs, as it gives you a pretty good immediate understanding of what your working capital is. The fact that you can break it down into “cost of goods sold” and profit metrics lets you judge in a general sense where to make improvements.
Of course, not all the expenditures of your business can be attributed directly to the product or service you are selling. You might have to pay rent, employee salaries, and marketing. All of these together are considered your operating expense. Once you subtract this number from your gross profit, you end up with a profit metric known as operating Profit. This metric is a bit more divorced from the actual day-to-day costs of doing business, but it is vital to understand how much working capital you’ll have at varying points throughout the year.
You probably don’t want to hear about more expenses to your business, but there’s a little more that you need to take into account. While Operating Profit will measure your regular expenses, you still need to take into account “extraordinary” losses - such as if you had to get rid of your offices, or yearly taxes. But there’s a bright side - “extraordinary” gains are a thing as well, such as when your investments pay off, or injections of cash from an investor.
After you take all these into account you’re left with the Net Income. Hopefully, this is a net profit, but it can also be a net loss. This is the most comprehensive of the profit and loss metrics and gives the most total view of your actual income. However, it’s most appropriate for longer periods - extraordinary loss and gain don’t happen every day.
Get CFO Assisted Metric Measurement Today
Want to learn more about profit and loss metrics? Are you looking for someone to build you a Profit and Loss Report? Or do you need someone to look at your P&L report and come up with some recommendations for financial performance? Contact us today and start unlocking the business performance advice to be taken from your P&L reports.