by Zedrick Clark
One thing I've always admired about natural foods store owners is the ability many have to run successful businesses with very little formal business training. Our passion for helping others got us into this business, but our ability to run our businesses successfully is what keeps us in business.
After working in natural foods for more than 10 years, I felt as though I was ready to go into business myself. I had managed several natural food stores, and worked in sales for more than six years. I also visited many natural food stores to learn what worked and what didn't in merchandising and marketing. But I had never read a profit-and-loss statement, and barely knew what one was.
Many owners may be in business for years before they see a profit-and-loss statement. Even if someone else is taking care of your bookkeeping or accounting, it is vital to understand this tool. It's your gauge for knowing how successful the business is, and it provides great information for setting goals. It can show trends that warn when the business is failing. It can also give you clues about where your business can grow.
The most basic function of a profit-loss statement is to determine your gross profit and net profit. Gross profit is the difference between cost of goods sold and total sales. Gross profit in our industry should be between 35 percent and 45 percent. Net profit is the difference between your gross profit and total expenses. Net profit is the bottom-line dollar amount that the business earns at the end of the day.
A profit-and-loss statement can usually be generated electronically through accounting systems such as QuickBooks or Peachtree. Your accountant can also generate one based on the information you provide. Before modern accounting software, nightly cash-register reports and your check-ledger book or bank statement provided the details used in a P-and-L report.
Usually a profit-and-loss statement begins with your income. Details are helpful here. For example, you can break down each sales category separately to serve your needs. At the very minimum, you should have your taxable and nontaxable items separated. However, I suggest having at least five to six major categories such as food, body care, vitamins, refrigerated, frozen and bulk. Any area that has high labor or very low margins should be tracked to minimize losses.
The next category is the cost of goods sold. This is how much you pay for your products for resale. The breakdown of your cost-of-goods-sold categories should mirror your sales categories. That way you can calculate individual gross margins for each category. If supplies are directly related to your cost of goods sold, such as a deli or bulk food that you pack, they should be listed under cost of goods sold as well.
Again, subtracting the cost of goods sold from your total income will leave you with your gross profit. This is how much money you have made before expenses.
It is extremely important to list all of your expenses. Some of your basic fixed expenses will be utilities, rent and insurance. These are expenses that should remain consistent and that you have limited control over.
It is also important to have your variable expenses listed. These are expenses that you can control in many cases. Some of these would be advertising costs, travel and entertainment, and charitable contributions. By tracking your variable expenses, you have the ability to help your company be more profitable. If the store's gross margin declines for some reason, these expenses can be reduced.
Some of the other standard expenses that will show up on a profit-and-loss statement are labor costs, professional fees and store supplies. These again are expenses that can be reduced when the store's profits are not in line with the owner's goals.
Last but not least, don't forget to create categories for any additional expenses that come through the business such as licenses, dues and subscriptions, and postage and shipping. Interest on loans that you pay, or bad debts you can't collect, should also be added to your profit and loss statement.
Zedrick Clark is the owner of Nature's Food Market in Berlin, Ohio. He also has a natural products consulting company and serves as chairman of the board for the Independent Natural Food Retailers Association.
Natural Foods Merchandiser volume XXVIII/number 6/p. 26,28