If you have a great product idea, you’re probably eager to get it to market. But before you invest your time and money into bringing your idea to life, it’s important to determine whether it’s likely to be profitable. One way to do this is by creating a profit and loss (P&L) statement.
A P&L (or Income Statement) is a financial document that shows the revenue, costs, and expenses associated with your product idea. By analyzing this information, you can determine whether your product idea is likely to be profitable.
Don’t worry, we’re not here to create a complicated set of financials for your product idea. Instead, we will provide the simplest and yet effective way to create a P&L (Income Statement) for your product idea. And we will provide you a free excel template to edit.
Before we start, let us remind you that the way you’re going to manufacture your products is going to affect the bottom line of your P&L (=profit). That is why we recommend collaborating with local Makers around you to turn your product idea into reality. This would help you avoid a massive amount of troubles when sourcing your manufacturing overseas.
Problem: international manufacturing is complicated.
– Big MOQ
– Timezone & communication gaps
– Costly shipping, risk of delay
Solution: manufacturing with the help of local Makers is easier.
– Produce as little as 1 item
– Same time zone and language
– National (fast) shipping
Finding the right Maker with the help of Neutrone is just a few clicks away. Now let’s go back to the main topic and get started.
How to Create a P&L (Income Statement) for Your Product Idea, Plus Free Template:
- Step 1: Estimate Your Revenue
- Step 2: Determine Your Trade Spend
- Step 3: Calculate Your Net Revenue and Determine Your Costs of Goods Sold
- Step 4: Calculate Your Gross Margin (or Gross Profit)
- Step 5: Estimate Your Marketing Spending
- Step 6: Estimate Your Operating Expenses
- Step 7: Calculate Your EBITDA and Net Profit
- Step 8: Use our Free Template to Calculate Your P&L (Income Statement)
- Bonus: Find A Maker Near You to Turn Your Product Idea Into a Reality
Step 1: Estimate Your Revenue
The first step in creating a P&L statement is to estimate your revenue. This is the money you expect to earn from selling your product. To estimate your revenue, consider the price you plan to charge for your product (Retail Sales Price, or RSP) and the number of units you expect to sell.
Follow Step 1 in our Free Excel Template to get your estimated revenue.
Step 2: Determine Your Trade Spend
Your trade spend (TS) is the margin you provide to third-party distributors and stores so they allow you to sell your product through their brick and mortar shops or websites. If you are going to sell your products directly, your TS will be (close to) zero. Alternatively, if you’re going to sell your products through Ebay, you might provide up to 13.25% of TS for each unit sold through that platform. Also, you need to consider credit card fees and other hidden costs.
Follow Step 2 in our Free Excel Template to estimate your trade spend.
Step 3: Calculate Your Net Revenue and Determine Your Costs of Goods Sold
Your costs of goods sold are the expenses associated with producing your product. This includes the cost of raw materials, labor, transportation (air freight, sea freight, etc.), and any other expenses directly related to making your product. To determine your COGS, estimate the cost of each component of your product and add them together.
Follow Step 3 in our Free Excel Template to estimate net revenue (NR), followed by your cost of goods sold (COGS).
Step 4: Calculate Your Gross Margin (or Gross Profit)
Your gross margin (or gross profit) is the net revenue (NR, in our template) you earn minus your COGS. This is the amount of money you have left over after you’ve paid for the expenses associated with producing your product.
Important Tip: in large companies such as P&G, Unilever or Reckitt, managers consider a GM%NR above 50% as the bare minimum to reach acceptable profitability for any new project. Anything that falls below this threshold might be rejected as not sufficiently profitable for the company.
Just like them, you need to carefully manage your RSP, TS and COGS to ensure your GM% target is delivered.
Follow Step 4 in our Free Excel Template to get your gross margin and gross margin as percentage of net revenue, and compare it with a >50% recommended KPI.
Step 5: Estimate Your Marketing Spending
Your marketing spending refers to the budget you need in order to develop any material related to your product (banners, leaflets, etc.) and to promote your product (advertising, PR, etc.). Estimate these expenses and subtract them from your gross margin to get the product contribution (PC).
Important Tip: we recommend managing your marketing spending so that you can reach a >20% of PC%NR. This will allow you to obtain enough margin to pay the rest of the expenses in your company, and reach final profit at the bottom of the P&L.
Follow Step 5 in our Free Excel Template to get your gross margin and gross margin as percentage of net revenue, and compare it with a >50% recommended KPI.
Step 6: Estimate Your Operating Expenses
Your operating expenses are the expenses associated with running your business, such as rent, utilities, marketing, and salaries. It’s important to estimate them accurately, and possibly input a % of increase over time due to inflation and other factors.
Follow Step 6 in our Free Excel Template to estimate your operating expenses.
Step 7: Calculate Your EBITDA and Net Profit
You’re at the final step. Use our Free Excel Template to calculate the EBITDA of your project. After that, you will have to pay taxes, interests (if any), depreciation and amortization (if any) to calculate your actual net profit. This is the amount of money you’re left with after you’ve paid for all of your expenses.
If your net profit is positive, your product idea is likely to be profitable. However, if your net profit is negative, you may need to adjust your pricing or reduce your expenses to make your product idea more profitable.
Step 8: Use our Free Template to Calculate Your P&L (Income Statement)
If you’ve followed all the steps above, you’re now ready to fill-in your first P&L to calculate whether your product idea can be profitable. Obviously, you can decide whether you want your project to be immediately profitable at Year 1, or if you want to invest and “seed” the first year and reach profit level from the following years.
You can download the Excel at the link below, no strings attached. And don’t forget to subscribe to our newsletter to receive a notification when we release a new version of our P&L. 🙂
This is version 1.0 of our free excel template that helps you to create a P&L (Income Statement) for your Product Idea.
Bonus: Find A Maker Near You to Turn Your Product Idea Into a Reality
You can take action now and discover local Makers and Artisans who can manufacture the product you need. Simply use the search engine below (or in the homepage). Search for any keyword related to the product you would like to manufacture, the category, or even the manufacturing process. Filter the results and narrow down the options to find the ideal partner for you.
Tip: search for any keyword related to the product you would like to manufacture, the category, or even the manufacturing process.
Here you have it, a quick guide on how to create a P&L (Income Statement) for your product idea, plus free template.
Creating a P&L is an important step in determining whether your product idea is likely to be profitable. By estimating your revenue, determining your COGS, calculating your gross margin, estimating your operating expenses, and calculating your net profit, you can make an informed decision about whether to invest your time and money into bringing your product idea to life.