Financial Expert Amit Perry on P&L Structure and How to Categorize Your Startup’s Costs
Getting your startups finances in working order is a foundational step for any business. And that’s especially true if you want investors to put money into your startup. Amit Perry, owner of Perrylion Ltd. and corporate finance expert, hosted a Labs session during the 5 Day Charge all about basic financial statements and cost categorization for startups. Here’s what you should know.
What’s a P&L?
A P&L, or profit and loss statement, “shows the results of your revenues and expenses,” Perry says. “It’s the measure of your financial results for a certain period and the most accurate report of business activities during that time.”
The P&L is often confused with other financial tools like the balance sheet, “which presents your assets, liabilities, and equity,” Perry says, the cash flow projections and burn rate. “It’s also, of course, not your business plan,” Perry says. “It’s crucial to understand the terms correctly so you know how to present your finances when you’re speaking to investors.”
What a P&L should look like
On your P&L, “the top line, revenues, is the most important line,” Perry says. “Next is the cost of the revenues and then you get the gross profits. The next three lines are operational expenses, which is usually R&D, sales and marketing, and general and administrative. Next you take your gross profit minus your total operating expenses and you get your operating income or loss. Then you have other minor expenses like finances expenses and taxes, which brings you to the net profit or loss.”
“This is the official P&L structure for technology companies,” Perry says. “And this is the expected way to show financial results when you're talking with investors.”
What goes into the business model
When you’re putting together a business model to show investors, “you should define the duration, meaning how long you are going to plan for,” Perry says. “It should be built bottom-up and include the exclusions, or things that are not included in the P&L. That includes grants, fixed assets, deposits, deferred revenues, liabilities.”
Your business model should also cover revenue, including revenue recognition, delivery, collection, and “evidence of having a contract with customers,” Perry says. “It should also cover deferred revenues, or revenues you cannot recognize in a certain period but can recognize in the future once you’ve earned it, like for a subscription business. You should also include gross revenues versus net revenues. For example, if you’re a marketplace, a lot of money is collected through you, but it’s not yours. So a marketplace must show their net cut and not just the total gross revenues.
It’s also important to differentiate between local pilots and the real world in your business model, Perry says. “In Israel, for example, because of the culture and the match between Israeli entrepreneurs and the Israeli community, it can be very easy to get a pilot. But when you try to do it in Paris, Berlin, or London, somewhere that’s not your local market, you’ll see differences that you could not have expected in advance. The intuition you have for your local market does not apply globally. So to get some conclusions from your pilot and implement them for a global model can be a major mistake. A local pilot is great but it’s not the whole picture.”
Business model should also cover your KPIs as well as your customer acquisition costs and how you measure them. (See the slide from Perry’s presentation below for more details.)
How to categorize your operational expenses
Operational expenses get divided into a few categories, starting with costs of revenue. The costs of your revenue are “all of the support and professional services you provide to customers,” Perry says. “It includes things like payroll, cloud expenses and IT services, royalties and affiliation fees, collection fees, and so on.”
R&D is another category that includes costs like R&D-related payroll, product costs that don’t fall under sales and marketing, and any costs associated with regulatory matters, tests, and certifications.
After that comes sales and marketing, which includes sales and marketing payroll, marketing spend costs, any costs related to go to market strategy, as well as costs from conferences, marketing materials, and marketing-related travel.
Next is general and administrative, which includes costs of management, professional advisors, human resources costs, any costs related to your physical office, insurance expenses, and generally, any cost that doesn’t fall under the other categories.
Finally there are financial costs including expenses like exchange rates and bank fees. Check out the slides below for a detailed breakdown of where all of these costs belong to make sure you’re categories yours correctly.