How to structure a profit and loss (P&L) statement: Donwload free template

Understanding financial statements may seem boring, but let’s remember that companies don’t just die because they don’t sell, they die because they don’t make the numbers. So a profit and loss statement is key to the health and viability of any business.

There is life beyond the MRR, gross margin, cost of sales, Cogs, profitability, Ebit are economic indicators for the viability of a business. In this post we will talk about them, about the structure of a profit and loss statement (P&L) or P&L in English, a crucial financial model to manage a business, and in particular we will see the examples of Software as a Service (SaaS) profit and loss statements or recurring and APPS.

In this article you have a simplified guide on an example of a profit and loss statement. We will take as an example the profit and loss statement structure of a SaaS.

P&L statement structure

To implement our Nextscenario automatic P&L financial model, we have talked to SaaS founders, financial and accounting teams. At this point, I have reviewed several SaaS P&Ls and I can say that about 85% are structured incorrectly.

The PYGs in most teams are used as a document that is returned to us by the accountant two months after the invoices have been sent to him, and all the value of analysis that this financial model provides us with is lost.

Most of them do not give it importance, because they do not take the trouble to classify expenses and income in the appropriate accounting accounts, and they do not know all the information that a good P&L can give us.

A properly structured income statement is a fundamental pillar of financial management, boards and investors.

Profit and loss statement Saas example

We are going to analyze the P&L structure of a SaaS, so that you can perfect yours or automate it with Nextscenario.

Profit and loss statement model for Saas

The SaaS business model revolves around the delivery of software through a subscription framework, replacing the traditional one-time purchase system. But what are the key components and revenue streams that define this model?

Our bottom line for a SaaS is structured into five main sections. These sections include recurring revenue, cost of goods sold (COGS), operating expenses… (OpEx) and non-operating.

When I evaluate a SaaS income statement, I start with a macro view of these sections. Do we have the major blocks in place?

• Revenue: Where the revenue is, whether recurring or non-recurring.
• Cost of Revenue: Costs associated with payments.
• COGS: Costs associated with the presentation of services.

P&L Template

You can download our free excel profit and loss statement template by clicking on the following link:

We will now go into detail in each section.

Revenue

In this section we include the revenues associated with the service we offer that are recurring and those that are not, such as onboardings, customizations, trainings…

Subscriptions — contracted MRR or ARR.

If we go into detail in accounting, to do it right you need different general ledger accounts for each revenue stream. If we don’t offer many products, we can have general ledger accounts for each product line. Be careful with this part, as, net revenue is used to calculate SaaS metrics.

When to register SaaS contracts?

A proper CRM setup is critical to facilitate the measurement of bookings. ARR bookings include new bookings and expansion bookings. Bookings are recorded at the time of contract signature execution. Bookings do not mean billing or revenue yet.

The revenue section of our SaaS income statement is defined by our products, services and pricing. We must show clear and distinct revenue streams. Recurring revenue must be separated from one-time revenue.

Cogs in a P&L account

Cogs (cost of goods served) or cost of goods sold, are the expenses in our SaaS business that are required to deliver and support the presentation of the service. In the case of a pure SaaS, this typically includes support, services (if there is onboarding), customer support (if they do not sell) and dev ops. Of course, there may also be transaction and hardware cost centers, such as hosting.

Here we wrote a complete article on how to define COGS well. But below we will explain a little bit too.

These are the costs that should be included in the COGS:

Technical support: inbound phone, chat and web support for customer requests, problems and bugs.

Services: Initial set up and training. implement, configure the software and train the customer in its use.

Transaction: expenses associated with variable revenues.

Customer Succes: Your priority is to do good onboarding to activate and retain customers and identify potential customer expansion.

Dev Ops and Hardware: Costs associated with maintaining customer-facing hosting infrastructure (i.e. AWS, Azure), customer upgrades and hosting SLAs.

SaaS Operating Expenses (OpEx)

The operating expenses of a SaaS are the expenses that support the infrastructure, growth and ongoing development of our business model.

In operating expenses we must include the part of the equipment that is not associated with the previous items, together with the tools and associated costs they need to carry out their activity.

These are some examples of opex:

R&D: Design, develop, test, test, fix and release software applications.

Sales: Selling your products and/or services to new and existing customers.

Marketing: lead generation, lead creation, events and branding.

G&A — human resources, finance, accounting, internal IT and legal. Tips and tricks

Each cost center has a full charge: salaries, taxes, benefits, travel, training, etc.

Department managers should be charged to their respective cost centers. It is possible to reclassify a percentage of salaries to the respective departments, if it has a material impact on your bottom line. For example, a software engineer who is also in charge of technical support.

Other Non-Operating Income and Expenses

The non-operating section summarizes our non-operating expenses and income. Here we include expenses and interest income from debt and/or interest earned on cash investments.

With non-operating expenses, we want to make sure that we are not classifying these expenses/income in general and administrative expenses or elsewhere in our income statement. Corporate income tax is included in this item if the entity is taxed at the corporate level.

Calculate gross margin of a profit and loss statement

The overall gross margin of a SaaS should not be below 70% and we should aim to be close to 80%.

The gross margin is the profit obtained after subtracting the cost of goods sold from the revenue. The gross margin of a SaaS should be close to 80%.

Application of a Saas P&L statement in practice and advice

By analyzing various use cases, it is clear that a well-structured P&L statement can reveal a lot about a company’s strategy and financial health. For your own business, make sure your P&L statement accurately represents your revenues, costs and expenses. Regularly review this statement to identify potential problems early and make informed decisions.

For the early stages of SaaS, it is not a priority to do this yet, but once you start having recurring revenue it is important to start setting up the right account structure. It costs little to do at the beginning, and a lot to redo if you leave it for later.

Also, consider tracking KPIs as key to a Saas: Churn, Net retention, Cac Payback, LTV… these indicators can provide additional information about the health of the business and help you optimize your strategies for growth and profitability.

Conclusion

Understanding and managing a company’s P&L is not just a matter of keeping track of costs and revenues. The P&L is a strategic tool that, when used correctly, can provide valuable insights into your business operations and financial health. By studying successful SaaS companies and applying their strategies, you can steer your own business toward sustainable growth and success.

What is a P&L?

A P&L, or Profit and Loss Statement, is a financial document that shows a company’s revenues, costs and expenses for a specific period of time, usually a quarter or fiscal year. It is also known as the income statement or profit and loss statement.

Why is a P&L important?

A P&L is crucial because it provides a clear picture of a company’s financial health. It allows managers and investors to understand how much money the company is making or losing, which areas are generating the most revenue, and where adjustments can be made to improve profitability.

What is the difference between a P&L and a balance sheet?

Unlike a P&L that shows revenues and expenses over a specific period of time, a balance sheet is a summary of a company’s assets, liabilities and equity at a given point in time.

How is a P&L used for business decision making?

A P&L provides key information that helps business leaders make informed decisions. For example, if the P&L shows that operating expenses are rising faster than revenues, it may be a sign that expenses need to be reviewed and adjusted.

How often should a P&L be reviewed?

It is advisable to review the P&L on a regular basis, either monthly, quarterly or annually, depending on the specific needs of the business. This allows managers to identify trends, make quick adjustments and stay on top of the company’s financial health.

What are the components of a P&L?

A P&L, or Profit and Loss Statement, includes several key components that reflect a company’s financial position in a given period. These components include revenues generated from the sale of goods or services, the cost of sales associated with the production of those goods or services, gross profit resulting from subtracting cost of sales from revenues, operating expenses related to managing and operating the business, operating profit before interest and taxes, non-operating expenses that are not directly linked to normal business operations, profit before taxes, income taxes, and final net profit, which represents the company’s net profit or loss after taxes. These elements provide a comprehensive view of the company’s profitability and financial performance.

What does the P&L of a Saas look like?

The P&L of a Software as a Service (SaaS) reflects the primarily subscription-based revenue derived from the fees paid by users to access the software, along with the costs associated with the IT infrastructure, such as servers and cloud storage. Gross profit is calculated as the difference between revenue and direct service delivery costs, followed by software development, marketing and sales expenses, as well as general and administrative expenses. Operating profit shows the profitability of core operations, while financial expenses and taxes are deducted to calculate the final net profit. This financial structure reflects the key aspects of the SaaS business model, focusing on recurring revenue generation and efficient cost management to achieve profitability.

What is the profit and loss statement? The profit and loss statement is a financial statement that shows a company’s revenues, costs and expenses during a specific accounting period, usually quarterly or annually. It is an essential tool for evaluating the profitability and financial performance of an organization.

What is the structure of the profit and loss statement? The structure of the profit and loss statement usually follows a standard format that begins with total revenues, then shows the cost of sales, operating and financial expenses, and finally presents the net result, which can be a profit or a loss.

What is the profit and loss statement used for? The profit and loss statement is used to evaluate a company’s profitability, identify areas of efficiency and opportunities for improvement, make informed financial decisions and comply with financial reporting requirements.

How is a profit and loss statement analyzed? Profit and loss statement analysis involves examining the relationship between revenues and expenses, calculating margins and key financial ratios, comparing current performance with prior periods and with competitors, and identifying trends and areas of concern.

What is the difference between the balance sheet and the profit and loss statement? While the profit and loss statement shows a company’s revenues and expenses over a specific period of time to determine its profitability, the balance sheet shows the income and expenses of a company over a specific period of time to determine its profitability.

Originally published at https://nextscenario.com on February 28, 2024.