How to Explain: The P&L

Hey there, my name is Michael King. Welcome back to the Connected Accountant where I talk about starting, scaling and optimizing fractional CFO services. Today I'm going to break down exactly how I explain the P and L to my fractional CFO clients. Now this is such an important skill to have because when you're able to explain finance and accounting concepts in a language that your clients can understand, it makes you seem much more relatable. But more importantly than that, when they're able to look at financial statements as an example and understand what's going on at a fundamental level, they're able to ask smarter questions and therefore they're able to get more out of the conversations they have with you as their fractional cfo. So today I'm going to walk you through my explanation of the P and L to entrepreneurs that work in the coaching space. Let's go ahead and dive in.

Alright, before we dive into the nitty gritty on the profit and loss statement and what all the sections are, I want to point out two important things right off the bat. First of all, you may hear the P and L or the profit and loss statement referred to as the income statement. Those terms are completely interchangeable. The second thing that I want to make sure you're aware of is that every profit and loss statement covers a period of time or a date range.

So the first thing that you want.

To look at any time that you run a P and L is what date range am I looking at? Let's jump into some of the mechanics of a P and L. A P and L has three primary sections. So I'm going to go into each of those sections and I'm going to give you some examples and a little bit further detail on what they mean. The first section of the P and L, this is the one that we all tend to know as entrepreneurs. The first section is revenue. Revenue is just another term for sales. That's the money that comes into our business through providing the goods and the services that we offer. So if you are a coach and somebody pays you for a coaching package, that's revenue, that's sales. Right? We all know sales, we all know revenue. That's the easy one. The next section of the profit and loss statement is the cost of goods sold or cogs and cost of services. It's actually not that complicated for coaching businesses, consulting businesses, or course creators, it's not that bad. The kinds of expenses that go into cost of goods or cost of services are other coaches. So if you have a coaching program. And you know, you've got your friend Amanda helping you out. She takes some of your clients and you take some of your clients. The money that you pay to Amanda would be considered a cost of services. So it's any money that you're paying to other coaches. Now I know a lot of you also have some, some cool things like journals or maybe manifesting crystals, yet you tend to have some of those, like physical products that your audience just loves to get from you. The money that goes out of your business towards buying those journals, towards shipping those journals, towards packaging those journals, those are cost of goods, cost of services, expenses. Okay? So again, cost of goods, cost of services is like, you know, other coaches that you have that are providing coaching services for you. Now, keep in mind, it didn't say this is your EA or your OBM or your marketing manager or your ADS manager, right? This is just services that you're providing directly to your clients, like other coaches. So cost of goods, other coaches, those kind of expenses in journals. Now another thing that I want to.

Point out, if you are an earlier.

Stage business owner, if you are maybe a sole proprietor or the solopreneur and you don't have an Amanda, you don't have someone else on your team offering coaching, you're not selling journals, right? Or planners or those kinds of things to your audience. You're just providing the services yourself. You may not have any cost of goods. Your cost of goods or cost of services might be zero. And that's absolutely okay. Don't think that you've got to have an expense here because you don't, and you probably won't until you start bringing on other coaches or start selling physical products. So the first section was revenue. The second section was cost of goods sold. Now, when we subtract cost of goods sold from revenue, we are left with gross profit. All gross profit is, is the money that's left over after you pay for these things, the money that's left over for operations. It's that simple. Once we subtract cost of goods from revenue, we know that we're left with gross profit. But if you've been in business more than about two hours, you probably know by now that there are other expenses in our business other than our cost of goods and cost of services. And we call those expenses overhead. Those are all the other expenses that you might have to pay in your business. Fancy people will call those expenses SG&A. By fancy people I mean like accounting nerds. You might also hear them referred to as operating expenses. And here's just a quick insider tip for you. SG&A stands for sales, general and administrative expenses. I like to call it overhead or operations expenses. It's just easier. Those expenses, those are the ones that we all know about. Those are covering things like our ads or our OBM or our ads manager, our Canva subscriptions, our cell phones, rent, payroll. All those things go into these overhead expenses. So when we take revenue, we subtract out our cost of goods, we're left with gross profit, we subtract our overhead. Boom, we're done. We're left with either a net profit or a net loss.

And that's really it.

That is the profit and loss statement in a nutshell. And as a coach or a course grader or a consultant, this is really all you need to know about the income statement or the profit and loss statement. Let your accountant, your bookkeeper, your CFO worry about the other complexities. This is really all you need to be focused on as the CEO.

And there you have it. That's how I explain the profit and loss statement to CFO clients that are.

In the coaching industry.

The number one most important thing that I want to encourage you to remember is that when you explain things, things like the profit and loss statement to your clients, you don't have to be 100% technically accurate in your explanations. Just give them enough that it's relatable, but more importantly, that they can make smarter decisions and ask smarter questions based on what you've shared with them. Listen, if you're thinking about starting a CFO firm, then I want to encourage you to check out this playlist where I give you the four steps that you need to follow to launch a CFO firm or start offering CFO services. In the meantime, I can't wait to see you back. Right here, my friends. See you then.

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