Your P&L, or your profit and loss statement, is the storybook of your ecommerce business, year after year. But everyone reads a book a little bit differently. Many of us read from start to finish, while others are skimmers, and others might read only the parts that seem most important or relevant to them. But one thing’s for sure: unless you read your P&L cover to cover, unless you truly understand every line of the report — you might miss something.
In this article, you’ll learn exactly what to focus on when evaluating your profit and loss report. You’ll also get proven tips and tricks on how to spot opportunities to make more money and spend less cash straight from the CEO of Obvi and host of Chew on This: Ron Shah.
But first. The basics.
What’s a profit and loss statement?
A profit and loss statement (or PNL, P&L, income statement, or statement of operations) is a financial report that details a company’s income and expenses over time, usually a month, quarter, or fiscal year. The P&L reveals both revenue and expenses, then declares the business’s total profit or loss over the reporting period.
How does a profit and loss statement work?
A profit and loss statement adds up all the money your business has made and lost over a certain period of time. These statements include operating and non-operating revenue, operating expenses incurred, cost of goods sold (COGS), taxes, and non-operating expenses. Sometimes, it can also be called an income statement, a statement of profit, or a statement of operations.
Now that you know the basics, here are 10 steps to follow next time you sit down with your P&L:
1. Start with net revenue, not gross revenue.
Gross revenue is not “real money,” and it shouldn’t be the first thing you look at on your PNL. Instead, focus on net revenue: the income generated by sales after key expenses like shipping, insurance, and discounts are deducted.
2. Negotiate everything—including the cost of goods.
Next on your PNL, move on to the cost of goods sold (COGS). If you’re selling consumer packaged goods (CPG), there’s no getting around this expense. But that doesn’t mean that every last penny of these costs is non negotiable.
“There’s no such thing as the pricing you started the business with being the pricing you should end up with. We try to say that if our business is growing, that means the manufacturer we're using, their business is growing as well, right? So why not tell them that, hey, we want to keep growing with you. But the only way we can do that is if you also give us something back.”
Ron Shah, CEO of Obvi
Whether it’s a 1% discount or a 50%, consider going back to manufacturers quarterly or even monthly to negotiate. Let them know that you’ve got a bigger order coming up—could they maybe provide you with better pricing, or work with you to bring COGS down by X% over the next few years?
3. Consider outsourcing 3PL.
Find your shipping and logistics costs on your profit and loss… and look at it very carefully. Far too many people overlook this line and don’t realize they shouldn’t be paying any extra fees. If your 3PL provider is charging you storage, incoming, and inventory fees, that vendor is likely making money off “fees” and not the services it’s providing you.
According to Ron, unless you’re shipping some massive products, your 3PL cost should be no more than 10% of your total revenue. (If your packages are quite light, that number could be even smaller.)
4. Closely inspect your labor expenses.
Now that you’re in the middle of the PNL, look at the cost of your labor and commissions. If these costs are going up, your sales numbers need to be following the same trajectory. Obvi likes to keep these costs around 10%, but every business is different.
5. Reallocate your marketing dollars toward retention and LTV.
Take a look at your marketing and advertising spending, then compare it to your revenue. According to Ron, if you’re spending 20% more yearly, you need to grow by at least 30%. And remember, revenue doesn’t always come from new customers—it often comes from retention.
That means the marketing resources that help you retain long-term customers and boost their LTV (lifetime value) are often the best investment.
Many companies attempt this via email, SMS, and website, while their customers would like to interact with something new, like an app.
“Tapcart has been a great way to give our customers more reasons to buy, more product to buy, and different ways to interact with the brand. It helps us focus on the numbers that matter: new customer acquisition cost, retention, and percentage, having lower churn (because we make easier shopping experiences), higher retention, higher AOV, and higher LTV.”
Ron Shah, CEO of Obvi
6. Consider outsourcing your CFO, controller, or bookkeeper
The experts handling your financials? You may only need them part-time. Chances are, you can get very experienced, exceptional financial talent to perform precisely the tasks your business needs in just a few hours a week. That’s a win-win: your business is spending less cash on staff, and your understanding of your business’s finances will be better than ever. I recommend checking out Finaloop for hands-off, real-time accounting tailored for ecommerce—DTC, multichannel, and wholesale.
7. Understand working capital
According to Ron, “Working capital is your best friend.” Talk to your (exceptional, and perhaps now part-time) CFO about cash flow utilization. You need money in the bank to continue, and an expert can help you understand how tools like credit cards or partner banks can ensure you keep growing. Because it takes cash to grow—and you’ll need more money than you’ve ever made to keep growing.
8. Upgrade your FinTech tools
Audit your FinTech stack to ensure you have the right tools to grow. The correct technologies can buy you time as you take on large but necessary expenditures.
9. Keep looking at your PNL non-stop
You—and whoever else manages your company’s finances, like a CFO, VP of finance, or controller—should constantly review the latest profit and loss report to determine that the PNL continues improving. This means considering whether the strategies you have in place and expenditures you have taken on are helping the company grow.
For example, influencer marketing. If your business has just started tapping into this strategy, how can you judge its success? Is it adding top-liner revenue? Is it adding low-cost acquisition? Is it adding profit? Because if it’s not doing any of those things, chances are it’s not worth focusing on right now.
10. Organize your PNL properly
For every category on your PNL, consider adding detailed subcategories for increased transparency. Ron reported sometimes including up to 20 subcategories. This way, you can truly, completely understand the numbers. It’s not just marketing but influencer marketing, digital marketing, retail marketing… These detailed line items can help you read your profit and loss statement like a book—and make whatever decisions need to be made to keep your PNL green as you continue to grow.
To follow Ron and get more digestible eCommerce tips, listen to the Chew on This Podcast to get digestable DTC content. They interview folks like Alex Beller (Co-Founder & President at Postscript) and more!