How to structure a P&L

This may not be the most exciting topic, but it is something that comes up a lot with the people I work with on a mentoring/ consultancy/ coaching basis.

To start with, there are many ways to structure a P&L. I am sure that people will argue for different ones. The one I am going to show here is based on what we do at Pooch & Mutt, a physical product business with multiple sales channels and outsourced manufacturing. It is what I have been taught by far more experienced people than myself and what (most importantly) helps me and my team understand the business and make decisions.

The role of the P&L is to help you see how your business is doing and to help you manage and adapt your business. It is a tool to help you manage your business, it is not something that you ‘have’ to produce for other people. Adapt the below to give you the best data to understand your business.

Turnover £The amount that you invoice. This can be broken down to turnover by product/ range or retail channel if that is helpful
Discounts £Including overriders and retro payments for discounting
Discounts %How much you discount as a % of turnover
Net sales £Turnover minus discounts
COGSThe Cost of Goods Sold. This can be broken down by product/ range or retail channel, as with turnover, if helpful
Inbound costs The cost to get the goods to your warehouse from your manufacturer
Gross Profit £Net sales minus COGS and inbound costs
Gross Profit %GP as a % of net sales (some people do as a % of Turnover)
Warehousing & DistributionThis can be broken down into; Internal goods movements, outbound distribution, warehousing and damages/wastage
Contribution £GP minus W&D. This gives a good figure of what £ your sales contribute to the company, as all the costs above are needed to make the sale.
Contribution %Contribution expressed as a % of net sales
Trade spend £This is marketing money that you spend that directly drives sales in certain channels ie in-store spend with supermarkets to drive sales in the supermarkets or google PPC to drive sales on your website.
Trade spend %Trade spend as a % of turnover
Optional: Website trade spend £If you have a high trade spend it can be helpful to break it down into sales channels (ie Website, retailers, Amazon), to understand where you £ is going
Optional: Website trade spend %Trade spend for the channel as a % of that channel’s turnover
Optional: retailer trade spend £as above
Optional: retailer trade spend %as above
Free contribution £Contribution minus trade spend. This is one of the most important figures in your business, as it gives you the income minus everything variable that you have used to get that income.
Free contribution %Free contribution as a % of net sales
Discretionary marketingAll marketing costs not in trade, ie design, photography etc. What goes in discretionary Vs trade marketing can be a bit of a debate.
StaffingSalaries and other costs of employment. This can include freelancers and consultants or you can have them separately.
OverheadsOffices etc
Total operating costs £The sum of the 3 rows above
Total operating costs %The above as a % of net sales
Operating profit £Free contribution minus operating costs
Operating profit %Operating profit as a % of net sales

The above is a basis for how to structure your P&L to help you run your business. It is not designed to meet any specfic accounting principles or to be submitted as your accounts to HMRC.

I am not an accountant, I am very far from being an accountant. For the first few years of running my business, we had a variety of bookkeepers who produced our P&L as part of our management accounts for us each month. We did this because that’s what I thought we were supposed to do. I didn’t really look at the accounts properly or understand them properly. I certainly didn’t use them as a valuable tool to drive day-to-day decision making.

Then, with outside help, we re-structred our accounting so that it was a tool that we could use to run and understand the business. We now look at our P&L by week, by period/month (for periods Vs months google 4/4/5 accounting) and year to date. We look at this on a weekly basis in our management meetings and it has totally transformed how we run this business. It takes time, effort and a great team to get this right, but it is one of the most valuable things you can do for your business.