Please Create Multiple Revenue Streams in a P&L Statement!

A Profit and Loss (P&L) statement, also known as an income statement, is a critical financial document that outlines a company’s revenues, costs, and expenses during a specific period. It provides valuable insights into a company’s operational efficiency and profitability. Too often though, business owners don’t make their P&L as helpful as it should be. They don’t get very clear with what their expenses are or how costly their payroll is. They don’t get a true gauge on how expensive it is to literally deliver the work that they produce! 

But one of the easiest things business owners (and their bookkeepers) can do that tremendously helps out is to break down your revenue streams into separate categories. This is an essential way to understand which areas of your business are performing well and which need improvement. Here are five helpful points to guide you through this process.

1. Identify All Revenue Sources

The first step is the most straightforward. Break down your revenue streams in the “Income” section of your P&L to identify all sources of income. This can include sales revenue, service revenue, rental income, interest income, and any other form of revenue. We even encourage some thoughtful creativity with this.

For instance, we have a cigar bar we work with where they have done a great job breaking down their income sources to some of their most crucial types of sales. From “Alcohol” to “Cigars” to “Non-Alcoholic Drinks,” they can have much more intelligent conversations about doing things like improving their drinks menu to reviewing overall pricing with their cigars in order to edge up their top-line sales little by little. 

So list all your revenue streams in detail. If you run a retail business, your revenue streams might include in-store sales, online sales, and wholesale operations. If you’re in the service industry, your streams might encompass consulting fees, project-based income, and recurring service subscriptions. You can even break down how stable your recurring service income is in the P&L! At Get Better Bookkeeping, as we’ve built up a good base of monthly clients, we’ve now broken down these income streams by their 1st month with us (brand new sales), their 1st year with us (recent customers) and clients that have stayed past one year (long-term clients).

2. Separate Operating and Non-Operating Revenues

Operating revenues are those generated from the core activities of your business, such as sales of products or services. Non-operating revenues are generated from secondary activities, like interest on investments, sale of assets and cash back rewards on credit cards. Separating these two types of revenue is crucial because it helps you focus on the income generated by your primary business activities. 

It answers the question: “Out of all the ways we receive money, which ways really come from the customers we work with? Rather than alternative sources?” For example, if a significant portion of your income comes from non-operating revenues, it might indicate a reliance on non-core activities for profitability, which could be risky in the long term. 

3. Analyze Each Revenue Stream’s Contribution

Once you have categorized your revenue streams, the next step is to analyze the contribution of each stream to your total revenue. This involves calculating the percentage share of each revenue source and evaluating its growth or decline over time. So if online sales contribute significantly more to your revenue than in-store sales, it might make sense to invest more in your online operations. On the other hand, if a particular service is not generating expected returns, you might consider phasing it out or revamping it (especially if it’s a really frustrating service)!

We work with a marketing agency in Tulsa, Oklahoma, where the business owner experimented with graphic design sales on Etsy. But after seeing how he split his revenue to clearly show “Etsy Sales”, we compared it to the costs of working on Etsy and found out he was just breaking even! We told him to turn his attention to better sales avenues, and that’s been helpful for him to think about one less thing in his business!

4. Compare Revenues With Specific COGS

This is where things get really interesting! Just like I mentioned with the marketing agency, we compared their Etsy sales to the actual costs of utilizing Etsy. If you can also separate the expenses into their own COGS (Cost of Goods Sold) categories, then you can get this feedback from your P&L to help you know where you are wasting time or truly leveraging your time! 

For the cigar bar, if it’s a normal expectation to receive a 3x markup on all alcoholic beverages, then if we sold $10,000 of alcoholic drinks in a month, we should only see expenses of $3,333 or less from the literal “Liquor Costs”. How else could we verify this if we don’t also split the expenses up to their direct costs of sales? This is where our work gets quite fascinating and enjoyable!

5. Track Revenue Trends and Implement Regular Reviews

Tracking revenue trends over time is essential for identifying patterns and making informed business decisions. This involves comparing your revenue streams across different periods—monthly, quarterly, or annually—and noting any significant changes or trends.

Regularly reviewing and adjusting your revenue streams is also key to maintaining a healthy financial state. This means periodically revisiting your P&L statement (at least once a month) to ensure accuracy and making necessary adjustments based on your analysis. Set up a schedule for these reviews and involve key stakeholders in the process. This not only ensures accountability but also brings diverse perspectives to the table.

Importance of Breaking Down Revenue Streams

Breaking down your revenue streams in a P&L statement is not just about maintaining accurate financial records; it’s about gaining insights that drive strategic decisions. Here’s why this practice is crucial:

  1. Informed Decision-Making: Detailed revenue analysis provides the data needed to make informed business decisions, such as where to invest more resources or which products to discontinue.
  2. Identifying Growth Opportunities: By understanding which revenue streams are performing well, you can identify potential growth opportunities and areas that need improvement.
  3. Risk Management: Knowing the sources and sustainability of your income helps in managing risks effectively. Over-reliance on a single revenue stream can be mitigated by diversifying income sources.
  4. Financial Health Monitoring: Regularly breaking down and analyzing your revenue streams helps in monitoring the financial health of your business, ensuring long-term sustainability.
  5. Strategic Planning: Accurate revenue data aids in strategic planning, helping businesses set realistic goals and develop effective strategies to achieve them.

By following these steps, you can ensure a thorough analysis of your revenue streams, leading to a healthier and more profitable business.

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