How The P&L Can Help With Pricing Strategies & Profitability

What comes to mind when you think of financial statements?

Thoughts of dread?

Thoughts of worry?

Happy thoughts?

What about pricing and profitability thoughts?

The number one financial statement that most entrepreneurs care about is the Income Statement, Profit and Loss Statement or affectionately known as the P&L statement. Whatever name you call it as entrepreneurs we love checking this report to see how our blood, sweat & sometimes tears are bearing fruit. 

What is the P&L?

According to Investopedia, “The Profit & Loss statement, is a financial statement that summarizes the revenues and expenses, costs, expenses, and profits or losses of a company during a specific period. These records provide information about a company’s ability to generate revenues, manage costs, and make profits.”

Can the P&L help us to create pricing strategies that help with more profitability?

The answer is yes. 

Revenue Analysis: The revenue on the P&L report is based on the prices you charge your customers. We can track trends in sales volume by different sales categories to see what is a top seller and what is a dud. Additionally, we can adjust the pricing of the top sellers to increase revenue. Think about when you go to the grocery store to buy a sales item and when you go back the item is no longer on sale it is now full price. 

Cost of Goods Sold or Cost of Sale: This metric can help to show the relationship between what direct costs (materials, labor) are contributing to producing goods or services. It can be useful to compare the COGS or COS to the revenue generated to arrive at the gross profit margin. The gross profit margin is essential for creating prices that cover costs and allow you to be profitable. The higher the GPM equals more revenue to cover business expenses which is a good thing. 

Expense Management: We all have operating expenses in our business like administration operation services, utilities, and all the rest. This portion of the P&L can help with creating pricing for your services or products. It is important that you generate enough revenue to cover all your expenses so you can remain profitable. Keeping a keen eye on these costs can help you to pinpoint waste and areas of improvement. The end goal is to use this information to keep your prices competitive and lucrative for your business.

Net Income: This part of the financial statement is a fan favorite. The “bottom line” as it is widely known as is where the rubber meets the road. It clearly shows if the business is making money or taking a L. The information derived from the bottom line will help to understand how well you have priced your products or services and if there is a need to adjust your pricing. 

There you have it. Financial statements are more than just what you give your tax professional at tax time. In particular, the profit and loss statement can highlight a myriad of things that affect how your pricing like Revenue, Cost of Goods or Cost of Sales, Expenses, and Net Income. It is essential to dig into the details of this report to see if improvements in certain areas can be made to increase profitability. Top companies already know this and use this information to create the following top 5 pricing strategies:  

• Cost-Plus Pricing

• Competitive Pricing

• Price Skimming

• Penetration Pricing

• Value-Based Pricing

These strategies are focused on different product and service types and changing market conditions. Click on the links above to learn more about each one and I hope it sparks your interest to use one of the strategies along with your P&L to drive more profitability in your business

Keep IT Sunny~

What Is On A P&L ?

Photo by Anna Nekrashevich from Pexels

As business owners, we can be so busy with taking care of our customers and managing our team that taking time to “mind our business financially” can take a backseat. This is dangerous. According to Preferred CFO in conjunction with research done by U.S. Bank 82% of businesses fail due to poor cash flow management. This links directly back to reviewing the P&L regularly to assess how your business is doing in the areas of revenue, expenses, and profitability.

Why You Should Know What Is On The P&L?

The P&L helps you to measure how much you are making versus what you are spending. It also helps you when you need third-party financing. It can also help you with recognizing and analyzing what is selling well and what isn’t.

What Is On A P&L?

The P&L or Income Statement is comprised of:

The revenue or top-line number: This is the total income received from all sales.

The expenses: This is the total amount of money the business spent on operating costs and costs of goods.

The net profit or bottom line number: This is the total of what is left over after subtracting expenses from revenue.

This is a basic description of what is on the P&L and can be more elaborate depending on the type of business.

The P&L is a key financial statement along with the Balance Sheet report. It is used to assess the financial health of your business, measure what goods or services are profitable, is needed for third-party stakeholders like banks, and explains how much money is being spent on expenses. In the end, it explains how much profit you made for all your efforts. It is necessary to review this report along with the Balance Sheet regularly so that you can stay on top of your business financial health and be able to make good business decisions.

Keep IT Sunny!