BUS613: Advanced International Business

Evaluating financial performance is an important way to measure the effectiveness of strategy implementation. Among many basic financial statements, a Profit and Loss Statement (also known as a P&L or an Income Statement) provides a clear overview of a retail business operation. Table 12.1 below shows a Profit and Loss Statement in its basic form.

P&L (or Income) Statement: a summary of the performance of a retail business after a given time period. A basic P&L (or Income) Statement includes Net Sales, Cost of Goods Sold, Gross Margin, Expenses, and Profit.

Table 12.1 Sample Profit and Loss Statement (Basic)

	Dollars	Percent	Description
Net Sales	$168,000.00	100.00%	The total amount received from customers. This figure does not include sales taxes as they are sent to the government directly.
Cost of Goods Sold  (COGS)	$84,200.00	50.10%	The total amount a retailer pays to buy the merchandise that is sold to customers. This figure includes freight and delivery charges, as well as workroom expenses.
Gross Margin	$83,800.00	49.90%	Net Sales – Cost of Goods Sold. This is the amount of money to cover operating expenses. The leftover is profit.
Expenses	$64,900.00	38.60%	The sum of fixed and variable operating expenses.
Profit	$18,900.00	11.30%	Gross Margin – Profit. If the number is positive, then the business has made money.

It's worth noting that the Profit and Loss Statement is usually a summary of the performance of a retail business after a given time period. For pop-up shops, it could be after a pop-up operation has been completed. However, many entrepreneurs also prepare a pro forma Profit and Loss Statement in advance of opening their business. It requires much research and many educated estimates, but it works well as a planning tool. For example, to come up with planned sales, one must ask the following questions.

• What will the average sale in the pop-up shop be?
• How many customers are expected in a day?
• How many days will the pop-up shop be open?

Assuming an average sale of $45 per each of 50 customers, the amount of sales each day would be $45 x 50 = $2250. If the pop-up shop operates for 10 days, then the total planned sales would be $22,500.

With the planned sales, one can move on to estimate planned COGS. Using keystone markup, if an item retails at $45,  then the COGS = $22.5 (50%). The Gross Margin would be $11,250 which should cover all operating expenses plus yield a profit.

By carefully controlling the operating expense items, a pop-up retail operator can estimate the profit. If the pro forma Profit and Loss Statement shows a negative profit, then the pop-up retailer should go back and play with different scenarios to adjust planned sales, COGS and/or expenses. This is a great exercise for the pop-up retailer to determine whether their planned operation is a viable business idea and how to best approach a profit target.