Let’s talk pizza and P and L statements! So P&L statements is your profit and loss statement. You might have also heard it called an income statement or a statement of financial performance. Or you might have heard of the misconception that is called a P&L which actually is incorrect. It’s P AND L.
Ultimately, what it comes down to you is a single piece of paper that is aggregating or summing up two different types of transactions. It’s summing up the revenue, meaning the money coming into your business, and it’s summing up your expenses. And those expenses are categorized in different groupings and different areas depending on your business, depending on the industry that you happen to be in. So what we’re going to do is take a look at a pizza shop, because we can all really easily understand what a pizza shop, and we’re going to walk through some of the larger categories you would expect to see on the P&L statement for a pizza shop.
And hopefully, as we go along, you can kind of draw some parallels to whatever business industry you happen to be in so that you can kind of build up a mental model of what you would expect to see on a P&L statement for your own company so that you can look at them and not feel intimidated and start using those PNL statements as an actual tool to drive more profitability into your business.
So let’s start at the very top. If you are running a pizza shop, how are you making money? You’re making money by selling pizzas to people. So your revenue number is going to be shown at the very top of your P&L statement. And ultimately, it’s really just nothing more than a formula that says, “X number of pizzas times X dollars per pizza equals my total revenue”. So that is going to be the foundation. Now, there can be some other little things that come into it to play. But let’s keep things really simple for now. A lot of the line items on your P&L statement, though, are going to be different expense categories. So if we kind of think of that one piece of paper, you might have one or two lines that are categorizing your pizza sales from your liquor sales out of your pizzeria. Essentially you might have some different categories of revenue. But most of the line items on your P&L statement is going to be different expense categories. So we’re going to look at three broad expense categories you would expect for a pizza the shop. Now, obviously, pizza shop is going to have more than just three different expenses. This is just a little bit of an example. So let’s think about a pizzeria. What would you expect to see at a pizza shop? Well, you’re going to see a kitchen, you’re going to see a counter with a cash register. You’re going to see tables, chairs and menus. shares. So one category of expenses that will show up on your P&L statement is going to be all of the annual, recurring, and ongoing costs associated with keeping the pizza shop open.
An important distinction is the actual cost associated with those really, really big things I was talking about actually, the building itself and big equipment, is actually going to sit on a different document that we call your balance sheet. Your P&L statement is going to be the annual cost. So an example of that might be paying utilities. You go into a keep the shop and you expect the lights to be on. Well, that’s going to be one of the annual expense items to keep that up and running. Probably some other cleaning supplies, so that the tables are nice and clean and ready for customers as they come in. Another big category of expense is going to be the pizza itself. So, the raw ingredients, the toppings, and the dough, essentially items you use to create the pizza. And this is going to typically fall under a special category on the P&L statement. That’s the type of expense that we call, “COGS”, which means, “Cost of goods sold”. And the distinction here is that we say these costs you can more directly associate with a specific customer or more directly associate with sales. Whereas, in the previous example, keeping the light on in the pizza shop, it’s a little hard to say order number 1234 is responsible for us keeping these particular light on.
And then the third category is going to be labor. So if you’re running a pizza shop, you’re actually going to have a lot of employees, a lot of labor related costs, whether that’s the people actually doing the cooking, whether that’s the people doing this serving or taking different orders. All of those employee and labor costs are going to be another large category of expense on your P&L statement.
I hope that these 3 very quick snippets of categories that you see on a P&L statement have given you a little bit of a better idea and tangible to understand what’s an income statement was and what a statement of financial performance is. And hopefully, you can kind of start to draw a few parallels to say, “My business is employees, so my employees, our chances are they’re going to be included in an expense category”, or, “I have direct items associated with what I sell!”.