Profit and Loss Statement

• Revenues: The money a company makes from the sales of its products and services.
• Cost of Goods Sold (COGS) or Cost of Sales: These are the direct costs the company incurs to develop the product or service being sold.
• Gross Profit: The difference between the revenue earned and the costs summarized in COGS. Gross Profit = Revenue – COGS
• Selling, General, and Administrative expenses (SGAs): Includes the following expenses:
  • Marketing, sale commissions
  • Salaries for office staff
  • Supplies and computer hardware
  • Note: Some companies list total operating expenses separately from SGAS while others treat them as synonymous with SGAS.
• Operating expenses: Expenses incurred outside of direct manufacturing costs:
  • Overhead costs
  • Legal
  • Rent
  • Utilities
  • Taxes
  • Interest
  • R&D expenses.
• Total Operating Expenses = Sum of SGAs and Operating expenses Total Operating Expenses= SGAs + Operating Expenses
• Operating Income: The difference between Gross profit and Total operating expenses Operating Income = Gross Profit – Total Operating Expenses
  • Note: Operating Income is also referred to as Earnings Before Interest and Tax (EBIT)
• Net Income: Subtracting the Interest and Tax from Operating Income gives the Net Income Net Income = Operating Income – (Interest and Taxes)

Sample File

• Profit and Loss Statement: (P&L statement) is also called an income statement. It is one type of financial statement that shows a company’s performance and financial position and is prepared at the end of each quarter or on an annual basis.
• Items needed to create the P&L statement are:
  • Revenue: Money that a company makes from the sales of its products and services
  • Cost of Goods Sold (COGS) OR Cost of Sales: Direct costs the company incurs to develop and build the product or service being sold
  • Gross Profit = Revenue – Cost of Goods Sold
  • Selling, General, and Administrative expenses: Marketing, sale commissions and salaries for office staff, supplies, computers, legal expenses, rent, utilities, taxes, and interests on any loans. SG&A typically excludes research and development expenses.
  • Total Operating Expenses: Expenses incurred outside of direct manufacturing costs
  • Operating Income/ Operating Profit/ EBIT = Gross Profit – Total Operating Expenses
  • Net Income/ Net Profit = Operating Income – (Interest expense + Tax expense)

Additional Resources

Check out the following pages to learn more about P&L statements across different types of industries.

• What is COGS for a service business?
  • Cost of Goods Sold (COGS) doesn’t quite make sense in the service world, as it is only used for product-based businesses. This article looks at a different approach called Cost of Revenue.
• Wikipedia page on P&L Statement
  • Wikipedia article that discusses the definition and history of P&L statements, also referred to as a profit and loss statement (P&L), statement of profit or loss, revenue statement, statement of financial performance, earnings statement, statement of earnings, operating statement, or statement of operations,
• More information on P&L statement
  • This article discusses how it is prepared based on accounting principles that include revenue recognition, matching, and accruals,
• Investopedia is a fantastic dictionary for business terms.

Gross Margin

• a statement about the overall profitability of the company.

Formula:

Gross\medspace Margin= \frac{Total\medspace Sales\medspace Revenue - Cost\medspace of\medspace Goods\medspace Sold}{Total\medspace Sales\medspace Revenue}

same with:

Gross\medspace Margin= \frac{Gross\medspace Profit}{Total\medspace Sales\medspace Revenue}

Sample:

• Gross margin in $: Gross Profit (23175) / Total Revenue (50000) = 0.46
• Gross margin: in % : Gross Profit (23175) / Total Revenue (50000) * 100 = 46.35%

break-even point = fixed costs / (sales price per unit – variable costs per unit)

Recap:

• Gross Margin = (Total Sales Revenue – Cost of Goods Sold) / Total Sales Revenue
• Can also be represented in percentage by multiplying it by 100
  • Gross Margin (in %) = [ (Total Sales Revenue – Cost of Goods Sold) / Total Sales Revenue]*100
• Gross Margin tells business executives what percentage of each revenue dollar is available to cover operating expenses after the COGS have been accounted for.

Contribution Margin

• the amount of revenue that covers the variable costs and is now available to cover the fixed costs and generate profits. 
• use to identify which product or product line is contributing the most to the profit margin.
• helps determine the break-even point where the pricing will cover fixed overhead costs and leave enough for profits too.

Company Costs

• Fixed costs
  • Fixed costs are expenses that you will incur on a regular, perhaps monthly basis, such as rent, utilities, and employee salaries.
• Variable costs
  • Variable costs are expenses that move up and down in response to production output. This interpretation is particularly helpful for companies to determine the pricing of the product.

Contribution margin helps them find the breakeven point where the pricing will cover fixed overhead costs for sure.

While the typical P&L statement line items tell us the overall profitability of our business, contribution margin can be used to identify which product or product line is contributing the most to our profit margin.

Formula:

Contribution\medspace Margin\medspace Per\medspace Unit=\frac{Sales\medspace Revenue\medspace -\medspace Variable\medspace Cost}{Units\medspace Sold}

1. Contribution Margin = sales revenue – variable cost.
2. Contribution Margin Per Unit = Total Contribution / Units Sold

You can think of the contribution margin as a percentage of your revenue that'll cover your fixed costs, which you have little control over and have to incur.

• If the contribution margin per unit > fixed cost is your profit.
• If the contribution margin per unit < fixed cost, this means you’re making a loss on each sale.

You have to sell your product with at least your contribution margin covered for each unit sale.

Terminology

• Fixed costs: Expenses incurred on a regular basis, such as monthly rent, utilities, and employee salaries.
• Variable costs: Expenses that move up and down in response to production output.
• Contribution Margin: The amount of revenue that covers the variable costs and is able to cover the fixed costs.

• Contribution Margin (58,800): Total Revenue – variable costs
• Contribution Margin per unit (2.94): (Total Revenue – Variable Costs ) / Number of good sold

We need to make sure we are getting at least 2.94 to breakeven, more if w want to generate a profit.

SAMPLE FILE

Recap:

• Contribution Margin Per Unit = (Revenue – Variable Costs) / Total units sold
• Total Contribution Margin = Total Sales Revenue – Total Variable Cost
• Variable costs include costs that change with the number of units produced. For instance, cost of raw materials, cost of services provided.
• It is particularly helpful for companies to determine the pricing of their product, in other words, find the break-even point where the pricing will also cover fixed costs and provide profit.

Additional Resource

• This interview captured in the Harvard Business Review provides a thorough but easy read about Contribution Margin.
• Check out this link for Contribution Margin that provides an excellent explanation for how Contribution Margin is derived. It also explains other ways to calculate contribution margin.

Stickiness Ratio = Daily Active Users/Monthly Active Users

Distribution of Data

As a Business Analyst:

• make sure to apply these statistical tools as you generate and examine the data using business metrics.
• A business metric is one data point that in itself does not tell much about the larger context. Much like other things in life, data makes more sense and has more value if it is looked at within a context.
• your data analysis process should include exploratory checks to examine the spread of the data. You should always be asking and checking to see if the data is spread out equally in each direction and to see if the shape of the distribution resembles a normal distribution or not.
• look at the data after dividing the data between subgroups. More informed recommendations are based on a detailed analysis of the data distribution.
  • For example, your market segments may be split across states, regions, or even countries. Always look at the data across these groups or other categories to let the data tell you what is working for one group and not the other.

Recap:

• Critical to look at the measures of central tendency to talk more about the nuances in the data, compare specific segments and slices in the data to the average or median.
• Without looking at the distribution, we can make the mistake of examining and making conclusions based only on the average.

Supporting Materials

• Business Metrics Lesson Terminology And Formulas

Lesson review

Topics Covered

1. Key Performance Indicators: We will start with a discussion about key performance indicators and how it differs by industries.
2. Business Process Flow: Then we will proceed to go through the business process flow across various business divisions. This will provide the context for learning about the business metrics. Business metric: We will take on each business area, such as marketing and growth, and introduce you to a metric commonly used to measure success in that business area. We will discuss what each means, and how to calculate it. We will practice calculating the metrics and applying the metrics, and when and where to use the metric. To do this, we will focus on 3 main elements related to metrics:
   • Evaluate important business metrics
   • Interpret and analyze these metrics
   • Create visualizations of these metrics
3. Distribution and central tendency: We will circle back to the topic of data distribution that you learned about in the previous lesson, and why paying attention to the distribution of the data and to the choice of measure of central tendency is important.
4. Grouping data: We will end with a discussion on how to look at the data across groups, cohorts, and time.

Let’s take a moment to summarize the key take-aways from this lesson.

Overarching Themes Summary

• Businesses use Key Performance Indicators to track how they are performing on key goals or objectives.
• The Marketing Funnel captures the various stages in the customer’s journey. At the top of the funnel, it captures the impressions, clicks, leads, and conversions at the bottom of the funnel.
• Optimizing the funnel refers to maximizing the conversion rate at each level of the funnel.
• The Sales Funnel captures the various stages in the sales cycle. At the top of the funnel, it captures the prospects, then the leads and qualified leads, and ends with bookings or closed deals at the bottom of the funnel.
• It is important to look at the distribution of the data to understand if the measures of central tendency represent a normal distribution. Looking at the distribution and measures of central tendency is a critical step of the data analysis process.
• Data should be examined split across cohorts, business cycles, time, product lines, regions, and other grouping criteria to fully understand the data. It is critical to slice the data across various factors to make sense of the data and make recommendations.

Metrics

Marketing

• Click Through Rate (CTR) is an indication of whether the ad campaign is generating enough interest in potential customers. When the CTR increases, it is an indicator of effective and interesting content in your ad campaign, and that maybe you should increase the number of impressions for that ad.
• Cost Per Click (CPC) is an indicator of the cost-effectiveness of the ad platform and a useful tool to compare and strategize about which marketing platform is yielding higher impression and reach and resulting in potential leads.
• Cost Per Lead (CPL) is an indicator of the cost-effectiveness of the ad platform and a useful tool to compare and strategize about which marketing platforms yielded more leads.
• Customer Acquisition Cost (CAC) is a useful metric used to get an estimate of how much it cost us to acquire the customer in the period the money was spent to reach out to them.

Marketing and Financial

• Cost Per Acquisition (CPA) allows a business to gauge whether the marketing campaign is generating enough potential leads.
• Life Time Value (LTV) allows you to focus on audiences and potential customers that will generate higher LTVs with minimum customer acquisition cost. There are several ways to calculate the Life Time Value and it is best to calculate the LTV using different ways to arrive at the average LTV for a customer.

Growth

• Stickiness indicates whether the customers are staying and returning to the website frequently enough. It is a good measure of the potential growth of the business.
• Churn rate is a measure of declining growth and businesses aim to have a higher growth rate than churn rate. It is a measure of whether the business is retaining the acquired customers.

Financial

• The Profit and Loss Statement also called an income statement, is one type of financial statement that shows a company’s performance and financial position. needed to create the P&L statement are:
• Revenue is the money that your company makes from the sales of your products and services
• Cost of Goods Sold OR Cost of Sales are the direct costs the company incurs to develop and produce the product or service being sold
• Gross Profit is the difference between the revenue and COGS
• Selling, General, and Administrative expenses capture a wide range of expenses, from administrative, sales commissions, supplies, legal fees, rent, utilities, taxes, and interests. It is used synonymously with Operating expenses. SG&A typically excludes research and development expenses.
• Operating Profit is the difference between gross profit and total operating expenses.
• Net Income is operating profit minus interest and tax expenses.
• Gross Margin tells business executives what percentage of each revenue dollar is available to cover operating expenses after the COGS have been accounted for.
• Contribution Margin provides the break-even point where the pricing of a product will cover fixed overhead costs.