Understanding your financial statements is essential for any successful business. Without being able to read and interpret the numbers, it is difficult to know how well your business is doing and where you need to make changes. In this article, we will discuss the Profit and Loss (P&L) statement and how to use the Cups and Streams Method to understand it.
What is a P&L Statement?
A P&L statement is a financial document that shows the income and expenses of a business over a period of time. It is used to measure the profitability of a business and to identify areas where changes need to be made.
The Cups and Streams Method
The Cups and Streams Method is a simple way to understand the P&L statement. It involves visualizing the money flow into and out of your business.
Stream #1: Revenue Flow
The first stream of money is the revenue flow. This is the money that comes into your business from sales. Think of it as the top of the faucet, or your cash flow before any deductions for expenses & working capital.
Cup #1: Variable Costs
The first cup is variable costs, also known as cost of goods sold (COGS). This includes things like ingredients, commissions, and other costs associated with selling a product or service. This cup "catches" some of the cash flow and pulls it out of your business.
Stream #2: Gross Profit
The second stream of money is gross profit. This is what is left over after the revenue flow meets the cost of goods sold. You want to manage this number to be bigger. It's that simple.
Cup #2: Overhead
The second cup that catches some of you cash flow and pulls it out of your business is overhead. This includes fixed costs such as utilities, salaries, and rent. Also called Fixed Costs.
Stream #3: Net Profit
The third stream of money is net profit. This is the most important stream, as it is the amount of money that is left over after all costs have been taken into account. Your job as a leader in your business is to maximize this number over the long term.
Understanding your P&L statement is essential for any successful business. The Cups and Streams method is a simple way to visualize the money flow into and out of your business. By understanding the different streams and cups, you can better understand your financial statements and make informed decisions about your business.