How do you know if your dispensary or rec store is successful? You’re open during normal business hours and you have a steady flow of customers. You also sell enough product to warrant ordering more. But all of these business essentials give you only an anecdotal assessment. Determining actual level of success requires a precise accounting of all outgoing money (expenses) and all incoming money (revenue/sales).
The P&L statement
All businesses need a deep understanding of their financial success or shortcomings. That’s where a Profit and Loss Statement, or P&L, comes in. You may also know it as your income statement, and it tells you how much or how little you’ve earned during a particular period. The period can be a month, every three months, six months or a year. It also helps you see financial trends for your business.
A business takes in revenue and must subtract expenses. This gives “net profit,” “net revenue” or “net income.” A positive number will place the business in the “black,” having made money. A negative number is a “net loss” and the business is in the “red,” having lost money.
You’ve also no doubt heard of a balance sheet. Many people new to analyzing a business for a financial perspective confuse the two. Whereas your P&L documents revenue and expenses to give a reading on your financial success or profitability, a balance sheet is a snapshot of the company’s finances at any given point in time based on assets, liability and owners’ equity. (We’ll cover balance sheets in another “Being a Better Manager” story.)
Why is this important?
Profit and loss helps a business see what direction it is headed. In case of a loss, cuts must be made (because of spending too much, being over budget, etc.). If a profit is being made, additional streamlining may increase profits—and expansion may be possible. The frequency at which a business creates a P&L statement may help determine progress being made, or allow you to ward off loss if a problem is noticed earlier in the operating year.
What am I looking at?
You have your business’s income or P&L statement from January to June of this year in front of you. It probably has a list of revenue sources. It might list daily flower sales (possibly separated by type), and product sold through your cultivation facility (if an appropriate license is held). All of this revenue is added together, and you have a dollar amount. Below revenue, you’ll find all the money you spent (your expenses). This includes labor, materials, utilities, depreciation (the reduction in value of tangible items, buildings, vehicles over time). The expenses must be totaled up, too. By subtracting expenses from revenue, you’ll get another dollar amount—your net income.
Example income statement:
The P&L example indicates that ACME has operated in the black for the past six months. It is wise to remember that this net profit figure does not represent an actual cash flow amount. Actual cash flow is determined by such items as the amount of cash in the bank, petty cash (on-hand cash to pay minor expenses), and expense paid. Cash flow can be forecast for the future by adding expected sales, expected collections, anticipated bills, etc. (We’ll cover cash flow in a future article, too.)
Calculating revenue, expense and profit over a period of time gave ACME a more accurate picture of their operations. This makes the P&L Statement a crucial financial assessment tool.
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