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All businesses, big or small, new or established, need a well-oiled marketing department that can track the health of the business and use that information to predict or forecast possible future income.

There are many weapons that a marketing department or agency has at its disposal to help your business’s long-term growth. However, none are more vital and impactful than a well-crafted profit and loss statement. P&L statements can positively and negatively influence your planned cash flow.

Surely you are chomping at the bit to learn as much as possible about a topic that can make or break your company’s success, so let’s dive right in!

What is P&L marketing?

P&L marketing stands for profit and loss marketing. It is a way to perceive your marketing as an entity that generates both profits and losses.

This empowers you to see if your current marketing strategy is successful or not by comparing the revenue generated against the costs of the strategy. 

The crux of profit and loss marketing is the profit and loss statement, which is a type of financial statement that is also known as an income statement. 

What can profit and loss marketing do for my marketing team and me?

In theory, the profit and loss marketing approach allows you to identify expenditures that drive revenue within several constraints, such as a maximum cost of acquisition, payback period, or an agreed-upon ROI constraint.

In plain English, it means that your marketing department will have the tools to achieve profits and long-term growth within fixed budgets and a profitability ratio without limiting resources.

Profit and loss marketing is a shift in mindset from “it’s just the cost of doing business” to seeing marketing as an investment that drives growth.

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Why a P&L marketing beats a marketing budget

The tried and true method of marketing that many companies follow to this day is setting a marketing budget for the quarter or year and then having the marketing department redistribute those funds to the necessary sub-departments.

The issue with a traditional marketing budget is that there is no way to track the return on investment, also referred to as ROI. This could lead to companies spending large amounts of their marketing budgets on forms of marketing that bring in little to no returns at all. 

A profit and loss marketing approach not only allows you to track which of your marketing strategies yields the most returns but also allows your marketing team to pivot and rotate between strategies to maximize those returns while minimizing costs to be as low as possible.

How to make an incredible profit and loss statement

As with many things, there are quite a few ways to craft a P&L statement. A well-made P&L statement can very well be the difference between a profitable and successful business and one that is chasing its own tail losing money on pointless marketing strategies.

In the following section, we will cover all of the vital metrics you need to include on your P&L statement that will help you maximize your profits and growth.

Important metrics to have on your income statement/profit and loss statement

The following metrics will help you create an income statement that will set your business up for success, whether it be a new start-up or an established business looking to get to that next level. 

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Marketing spend

You will want to track your overall marketing spend for a given period, whether it’s quarterly, monthly, or annually. The important thing is to track your overall spending, as it acts as the baseline of the whole statement. 

You can not track the overall success of the marketing department without tracking your marketing spending. You can have sub-metrics of individual marketing projects under this heading for a more detailed report, such as affiliates programs, TV and radio marketing, print marketing, and online marketing.

Knowing the total amount spent by the marketing department is also vital to know if you are within any budget constraints that have been set at the start of the given period.

Revenue

No income statement can be complete without an income column. In this case, it’s called the revenue column. This will be the second core part of your income statement.

Your revenue will dictate if a given marketing program or strategy has paid off or carried the ROI you require. Alternatively, it will also reveal if a given strategy was unsuccessful and needs to be dropped or reworked.

Revenue and marketing spend on their own will not reveal all of the information you require to make these decisions, but that’s where the other metrics come in.

Cost Of Goods Sold (COGS)

The cost of goods sold will help you track what it costs you take to make a sale. Usually, the formula you would use to track this metric is as follows COGS per product multiplied by products sold = total COGS.

COGS includes costs that are directly related to your manufacturing process. You will not include indirect costs such as overhead or marketing costs.

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Gross profit, excluding marketing, spend

Your gross profit, excluding marketing spend, is a function you should have on your statement. The function is derived from deducting your COGS cell from your revenue cell. 

Your formula should look something like revenue minus COGS.

This metric gives you an idea of the gross profit earned without deducting what you have spent on marketing. Knowing your gross profit, excluding marketing costs, allows you to accurately see the impact of your marketing strategies.

Tracking your gross profit, excluding marketing spending, also allows you to track other metrics without adding the marketing costs to the equation. For example, if you have a business that requires add-on sales or upsells, then you can use the gross profit, excluding marketing spending, to more accurately calculate how much your sales team impacts those sales.

Gross profit, including marketing spend

Your Gross profit, including marketing spend, is a function that should be right after the previously mentioned function. The formula for this function is very similar to the previous one as you are deducting your COGS cell from your revenue cell, and then you deduct your Marketing spend cell.

It should look something like revenue minus COGS minus Marketing Spend.

This metric is probably the most vital out of all of the metrics on the statement, as it directly shows if your marketing has been successful or not. 

More advanced metrics you can optionally include

The above-mentioned metrics are the bedrock upon which you will build your income statement. However, to have a fully realized and detailed P&L statement, the following advanced metrics are required. 

The following six metrics will help you understand what is promoting growth for the company and what is hampering it. 

New customers

In this cell, you will fill in the number of new customers you have generated within the given time period. 

The new customer metric helps you track the success of your marketing campaigns. New customer metrics also help make projections for future revenue and other metrics more accurate.

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Customer acquisition cost

This metric will be calculated for you by dividing your total market spend by new customers in a  given period. The handy dandy statement that was included earlier will do this for you automatically. 

This is another piece of the puzzle that will highlight how well your business is growing and, by extension, how well your marketing strategies are paying off. If your CAC is high, then you might need to tweak a few things in your marketing approach. 

Payback period

There is no metric on this statement that will affect your cash flow more than the payback period. This is a metric that measures how long it takes to break even on your marketing investment.

It is calculated by dividing your gross profit ex-marketing spend by your marketing spend. The payback period also allows you to make calculated and informed decisions about future marketing campaigns. 

For example, if you know you can afford a 12-month ROI from your current marketing campaign, then you can increase your marketing spend to match your current revenue so that your payback period extends to 12 months from the current period of time.

Gross profit per user

This metric does as it says on the tin. It reveals your gross profit per user, customer, or client. Another vital metric in gauging the health and growth of your business.

Knowing the exact amount of gross profit generated by each user/client will help you create projections and predict the expected growth of your business.

The gross profit per user is calculated by dividing your total gross profit, excluding marketing spend, by your new customer total for the given period.

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Predicted LTV

Your predicted LTV is an abbreviation for the predicted lifetime value a customer could generate. We will cover a  little later why this is a predicted LTV and not an actual or pure LTV.

 So, if you have a customer and you fill in the top of the statement you expect customers to stay around for twenty-four months, then the income statement will multiply that value by the gross profit per user.

This will give you an idea of the future cash flow you can expect to generate from each customer, user, or client.

Return on Investment (ROI)

Return on investment is the final metric you need on your p & l statement. It is calculated by dividing your predicted LTV by the CAC. This is important for you to see what the value of every sale is compared to how much you have invested into the sale. This is s super helpful metric when looking for investors or applying for a loan application.

For example, if you have spent $1,000.00 on marketing and your LTV is $3,000.00, you have a return on investment of 3, meaning each sale is worth 3 times what you have invested.

Why customer lifetime value is a dangerous metric for a new business

The reason why we advise using predicted LTV over pure or actual LTV is that it is far too easy for new businesses or first-time entrepreneurs to over-predict how long new customers may stay with the company. This can very easily and quickly lead to overspending.

A cautious approach is best for new companies and business owners as it is very easy for anyone to misunderstand or be uncertain about how to correctly interpret customer lifetime values. 

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Pros and cons of P&L marketing

It is easy to get swept up in all the excitement and promises that a well-crafted P&L statement has to offer. Alas, as with all things in life, there are pros and cons to consider before implementing it in your open business to make sure the cons do not outweigh the pros.

Pros

• Allows your marketing department to be agile and adapt to situations as they occur.
• Highlights the strengths and weaknesses of a given marketing campaign.
• Gives you a detailed analysis to make informed decisions to grow your business.
• Looks good to both potential investors and banks when applying for a loan.

Cons

• It cannot guarantee future success, as it relies on predictions.
• It leaves room for the manipulation of financial information, such as delaying big purchases or promoting large assist sales at the end of a financial year to make profits look larger than they are. 
• Not a standardized format, meaning the exact layout may change from country to country. 

Key takeaways for your P&L marketing future

Now that you understand how powerful a P&L statement can be for your business and also what pros and cons they carry, let’s just pack everything into three major takeaways for you to remember.

Ensure that your marketing department is 100% aligned- it is important that your marketing department understand how this strategy works and that theta re 100 on board with it. Let them run their own profit and loss program and assign them full responsibility.

Make sure you track the right metrics – What metrics you choose to track will either fill your statement with helpful, empowering information or with misleading information that proves to be not as useful as other metrics may have been. 

Remember that LTV can be dangerous for new businesses – relying on LTv can quickly and unexpectedly lead to overspending, which can burry a new business before it even has the chance to crawl. So play it safe and conservative when predicting the LTV.