Profit And Loss Statement For Business – A few years ago I explained to my manager that I was feeling a little down and they told me to learn how to read a profit and loss (P&L) statement. At the time, this sounded suspiciously like, “Don’t waste my time anymore,” but taking on an executive role has changed my perspective a bit: It’s actually surprisingly useful for learning. The P&L statement is a map of a company’s operations and is an effective tool to guide you to the most pressing areas you need to delve into.
While there’s a lot of depth to reading a P&L, this will get you from zero to one and hopefully take just under thirty minutes. I’ll start by looking at the components of an income statement, describe the steps I use to review an income statement, give an example of how to apply those steps, and end with instructions for locating the P&L statements of listed companies that were practiced.
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To view a P&L statement, we need a P&L statement to read, and I’ve selected the Summary of Consolidated Financials on page 18 of HashiCorp’s S-1 filing. It’s handy to have it handy to refer to everywhere.
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There’s a lot there! First, let’s look at the main headlines. The first three columns show earnings for 2019 through 2021. All the numbers here are “in thousands,” meaning $18,503 is actually $18,503,000, and so on. The last two columns look at six-month windows. We’re trying to understand the business in general, to focus on the full-year numbers.
When viewing internal data, it’s especially important to understand where a chart transitions from historical data to forecast data. It is very common when we talk to a fledgling startup that they include their slightly optimistic current year forecast in their financials. On the other hand, publicly traded companies essentially never share forecasts. All S-1, 10-K and similar filings are historical records. There are cases where the initially reported data looks like a forecast, for example, some companies end their fiscal year in January, which is the case here for Gitlab: their fiscal year 2021 only runs until January 31, 2021, so their 2021 results are
A prediction, although this report was released on November 4, 2021. (As a result, most of Gitlab’s 2021 achievements would only be made available in their FY2022 report.)
There are a few more rules, but everything else you can ignore from a business point of view.
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Finally, it’s worth taking a moment to consider GAAP versus non-GAAP. The Financial Accounting Standards Board sets the accounting rules known as GAAP, generally accepted accounting principles, and most of the financials you will see will label themselves as GAAP compliant or not, for example, this segment of statement 10-K from HashiCorp .
There is little consistency in how companies calculate their non-GAAP financials, making them difficult to reason with. Typically, companies exclude one-off or one-time costs. Assuming you’re looking at your company’s internal P&L, it’s best to ask someone from your finance team to clearly show you how each non-GAAP figure differs from the GAAP definition. Non-GAAP often provides a better understanding of a company’s operating condition, but the goal of any non-GAAP measure is to
Now that we’ve covered the individual components of the P&L, let’s dive deeper into its analysis. The first step we need to take is to move it to our spreadsheet so we can do some basic calculations, in this case using Google Sheets. We’ll start with the columns that track year-over-year (YoY) growth.
Once you have a version of the table that you can modify, the remaining steps I’ll use to explore the statement are:
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The last step we take after collecting our questions. To do that, we go through the table row by row and implement the first three steps, starting with income:
Another question for each of these industries is what percentage of sales come from new customers and what percentage from new customers. The core of a good SaaS business is a healthy refresh rate: you need a much smaller sales force to drive revenue growth if the product is able to sustain existing revenue well.
Next, we look at “cost of revenue”. What’s really interesting are the places where cost growth is accelerating or slowing relative to income growth. For example, license revenue increased by 96% in 20-21 and costs rose slightly more slowly by 82% in the same period. This means that they achieve a number of economies of scale in their growth. Conversely, it will certainly be interesting to dive into the revenues and costs of cloud services, where revenues only grew 75% between ’20 and ’21 while costs increased 246%. By not understanding the strategic role of cloud services, the P&L doesn’t tell a particularly optimistic story about its trajectory.
Sometimes interesting questions arise from shifts in time, for example, it’s interesting that the increase in support costs outpaced the increase in support revenue in ’20, but not in ’21. Understanding why support costs rose more slowly in ’21 than they did in ’20 gives you valuable insight into how that business really works.
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Looking at total revenue growth versus total cost of revenue growth, there’s a somewhat disturbing trend of revenue growing more slowly than costs in ’20 (155% versus 125%) and slightly faster than costs in ’21 (75 % vs. 72). %). However, this is a situation where looking at the percentage increase is a bit misleading. Absolute values show a much healthier story as evidenced by the gross profit line with strong positives along the line.
The others are operating costs. Sales and marketing (S&M) spending increased slightly in ’20 and then slowed in ’21 on a relative basis. However, on an absolute basis, S&M expenses increased by approximately $50 million both years. That’s a big increase, and it’s worth looking into where that spend is going. It’s often helpful to look at the relative size in the operating sections and personally I find it a bit surprising that General and Administration (G&A) is a larger operating expense than Research and Development (R&D) and I’d like this a little bit understand better.
Finally, a quick look at the net loss. This is not a profitable business and the loss is increasing. However, the losses grew slower than the sales growth in ’21 and increased
Slower than income growth in ’20. Understanding what drove that turnaround (at least part of it was the doubling of G&A costs from ’20 to ’21) will make the path to profitability much clearer.
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Okay, so let’s wrap up by looking at how to dig into each of the surprising points (from an insider’s perspective). What I’ve found most effective is to group questions by team to follow up on, submit your questions, and then schedule a time to discuss.
After these conversations, you will have a much clearer picture of the reality of your business. Before doing an exercise like this, you can
That you understand your business, but you relied on other people’s interpretation to drive that understanding. Now it is your understanding that drives your faith.
. This is true in a discrete sense, but in reality your understanding just stops until the next P&L iteration becomes available. For example, we reviewed HashiCorp’s S-1 regarding their performance through January 2021. They shared the results through January 2022 in their 10-K issued in March 2022. On page 77, they shared their results for the year 2022 (meaning concretely, the results until January 2022).
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I won’t go into the full details, but if you look at this spreadsheet that combines their S-1 and 10-K results, you can see they’ve had a challenging year. HashiCorp is far from alone in this regard, almost everyone is going through a rough year, but if they rise to this challenge, they can emerge from this disaster as a much more profitable company. This uncertainty is part of why I generally don’t recommend people make optimal financial moves during a recession.
A brief explanation of how to find profit and loss statements for publicly traded companies. All numbers shared in this section are public and can be found by going to the Securities and Exchange Commission’s EDGAR search and typing in the company name. Using HashiCorp as an example, I started typing “hashi”, then the query suggested HashiCorp’s ticker “HCP” and clicked through to HashiCorp, Inc.’s site. From there, click “View Filings” and you can see all the filings of interest, especially S-1s and 10-Ks.
Most companies also have an investor relations (IR) website such as HashiCorp’s ir.hashicorp.com with links to their latest documents, such as this page hosting HashiCorp’s quarterly results. It’s generally easier to use EDGAR, but an IR website will often embrace the company’s preferred narrative through earnings calls and press releases. Even if you want to understand the company’s preferred story, I recommend reading their unstory P&Ls first to avoid focusing too much of your attention in their preferred direction.
In conclusion, P&Ls in early stage companies are often wrong and can be wrong in many different ways. Costs can
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