People with fancy MBA’s like to create complicated financial models

As a simpleton I break down a P&L into 4 numbers

This model works no matter the size of the business

Every business has 4 key numbers:
1. Sales - cash that comes into the business
2. Contribution - cash left over after paying all variable expenses
3. Fixed Expenses - stable recurring expenses
4. Net Profit - profit left after paying all expenses (View Highlight)
Contribution - cash left over after paying all variable expenses Variable expenses are directly tied to your sales When sales go up, variable expenses go up (View Highlight)
For franchises there 5 major variable expenses: 1/ COGS - cost of goods sold 2/ Royalty - for franchises 3/ Advertising - you must advertise to drive leads 4/ Direct Payroll - cost of performing the service 5/ Credit Card Fees - cost per transaction (View Highlight)
Contribution is the amount left over after paying all the variable expenses (View Highlight)
Fixed Expenses All of the expenses that are fixed every month. They have minimal correlation to sales volume
- Rent & Utilities
- Debt Payments
- Fixed Payroll (Managers, Admin, etc)
- Insurance
- Technology
- Other Misc Expenses (View Highlight)
No “net profit” exists until you fill up the bucket up Once filled all the incremental contribution profit overflows & becomes net profit (View Highlight)
To get started take your P&L and categorize all expenses as either
1. Variable - it goes up and down with sales. COGS, payroll, cc fees, advertising & royalties (if you’re a franchisee).
2. Fixed - everything else that doesn’t go up & down with sales (View Highlight)