Why doesn’t my Net Profit agree with my Profit & Loss Statement?

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We often get this question from users who build their model only to find out that the net profit is nowhere close to what they have been seeing on their profit & Loss statement. They assume that what they are seeing in their Planning For Profit software model is incorrect. But…not so fast.

Your Profit & Loss statement looks at your company from an accounting perspective. Planning for Profit looks at your company from a cash flow perspective. There are three big differences between these two documents.

Equipment Replacement Costs vs Depreciation

Your Profit & Loss statement might have depreciation listed in the expense section. Depreciation reflects what you paid for your trucks and large equipment several years ago and is an accounting item. Equipment Replacement costs reflect what it will cost to replace those same trucks two, three, or four years into the future and builds those costs into today’s pricing. The typical companies’ actual equipment replacement costs are 25% – 35% higher than the depreciation showing on your P&L. You must get tomorrow into today. Planning For Profit takes this into account.

Loan Payments

When you make a loan payment, part of that payment goes to cover the interest on this loan, while the rest of the payment goes towards the loan principle. The only part of this loan payment that shows upon the profit & Loss statement is the interest. Any portion of the payment that is applied to the loan principle shows up on the profit & loss statement as profit. As a result, the net profit showing on the P&L will higher than it actually is. This is just one reason why you get to the end of the year and your account tells you that you had a great year. You know, those times when you are thinking “If I made that much money, where is it because it’s not in my account.” The more loans you have in your company, the greater the impact in this area.

Building an Equipment Replacement Fund

Planning For Profit wants to make sure that they pricing that is established will insure your company’s profitability. As a result, the dollars calculated for equipment replacement costs are subtracted from the Net Profit in the Fixed Expense section of the cash flow P & L. The net profit shown on the cash flow report is the final net profit after loan payment principal payments and equipment replacement dollars are subtracted.