P&L and Retantion
Konstantin D
???? IT Lead Product manager | B2B | B2C | Digital | Mobile and Web Apps | R&D |
Magical guide about?#productmanagement. Part 7 article #55
P&L (Profit and loss statement)?is a report showing the company’s profit and loss for a certain period. It shows how much the business earns and whether it earns at all.
The company’s Profit and Loss Statement (Profit and Loss Statement) is one of the three main financial instruments of management analysis for any type of enterprise. It allows the investor, the owner, the shareholder to assess the marginality of the project at any time. And if the balance sheet is a “snapshot” of activity for a certain period (as of a specific date), then P&L reflects the financial result: the company made a profit or worked at a loss (by comparing income and expenses related to obtaining this income).
What is P&L?
The P&L report explains why (due to which incoming/outgoing transactions) the balance between the reporting dates has changed. In other words, an investor in the P&L report can see a picture of business efficiency: how much the company’s operating activities bring, what part of the earned capital goes to cover current expenses, how the balance between the revenue and expenditure part is achieved, and, accordingly, what profit should be expected at the end of the reporting period (or what part of the profit will be received equity participants, shareholders, investors, etc.).
The P&L report is an integral part of management accounting, which allows you to make timely decisions aimed at business development. The frequency with which the profit and loss report will be generated (monthly, quarterly or annually) depends on the accounting policy approved by the company.
Who prepares the P&L report
As a rule, the report generation does not require any special conditions or complex software. An ordinary accountant or economist may well be engaged in its preparation and management. And the first thing he will have to face is an Excel spreadsheet consisting of two main blocks “Income” and “Expenses”.
There is no clear definition of articles that must necessarily be reflected in a particular category. This will largely depend on the specifics of the company’s activities, the branching structure, the organization of the production process, the sales market, etc.
It is also worth considering an important nuance: according to IFRS (international standards), income and expenditure transactions should be entered in the summary table upon the transaction (i.e. when the goods are shipped, sold / purchased), and not by the date of crediting or spending of funds.
How to “read” P&L?
When all operational items are separated into the corresponding parts of the table, it’s time to summarize, analyze activities, and develop a further business strategy.
Types of activities reflected in the p&l income statement
Each company operates in two areas that bring it income and on which it is necessary to spend resources:
1. The main activity?is the production of products, the provision of services. This activity was the main purpose of creating a company to generate income.
2. Other activities?— related activities related to other sources of income and profit. Examples of this activity are lease relations, transactions with securities and currency, sale of various assets, etc. (unless, of course, the main activity of this company is not related to the examples given).
Procedure for the formation of retained earnings
For example:
Break-even point
Example of P&L application
“Suppose you interested an investor, he conducted his market assessment, and she satisfied him. The next stage is the reconciliation of the numbers. The investor asks you for a standard P&L report, balance sheets, cohort analysis, etc. Practice shows that even large startups with good revenue do not have such reports, they are available to a maximum of 2% of companies.”
For example, the revenue of a summer kebab shop for a month amounted to 300,000 rubles, of which 230,000 rubles were brought directly by the sale of kebabs, another 50,000 rubles were received through the sale of beverages and 20,000 were raised on the sale of semi-finished products. At the same time, expenses for the period amounted to 230,000 rubles, of which about 120,000 went to the purchase of meat, another 70,000 was spent on coal, 30,000 on the work of a cook and 10,000 on the rental of a point.
Below we will present the simplest version of how profit is calculated in a P&L report:
As we can see, our kebab shop did not earn a net 70,000 rubles, although it seemed that it was a plus and brought a good profit. This is exactly what P&L reports are for, in order to understand at what stage a serious loss of funds begins and how you can bring the company to a plus.
What is customer retention and retention rate?
So that the client does not leave you after the first purchase, it is necessary to build communication with him. Offer related products, give a discount, make a personalized offer, use communication channels that are convenient for him. If the company succeeds, cross — sales and repeat sales grow.
It is cheaper for a business to sell to an existing customer than to attract a new buyer. Anyone who has bought from the company at least once does not need to talk in detail about the advantages of the product, introduce the brand from scratch. The client is already familiar with the company’s product range and delivery terms. He has already received a positive purchase experience and can make more than one. With a probability of 60–70%, you will sell a product or service to an existing customer. The chances of selling to a new lead are 5–20%. And at the same time, you will spend the advertising budget to attract it.
The CRR indicator — customer retention rate or simply retention rate — helps to assess how successfully a business retains customers.
Why count the customer retention rate
Entrepreneurs often seek to attract new customers and forget about those who have already made purchases. The Retention Rate calculation is necessary because it is easier and more efficient to work with a ready — made database — you do not need to introduce the user to the company and prove the quality of production.
Three reasons why the CRR is an important metric to keep an eye on:
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How to calculate retention rate
Retention rate shows the ratio of customers who returned for repeat purchases to the number of customers at the beginning of the billing period. To calculate retention rate, you need to know the number of:
Calculation formula
So, to calculate the retention rate for a month, you need to subtract the number of new customers from the total number of customers who made a purchase for that month. This is done in order not to take into account new customers — they do not compensate for the outflow. For example, the calculation of the RR of an online store for a month:
RR = (120 ? 40) ÷ 100 × 100% = 80%
How often to count RR
Usually RR is calculated for a year, half a year, a month or a week. The period depends on several factors: the transaction cycle, how often people buy the product, how fast the company is growing and what business model. For example, people use communication services every month, so it makes sense to calculate the RR per month. And a winter clothing store that is bought once a year, it is better to calculate the annual RR. For example, let’s calculate the annual RR of an online winter clothing store:
Retention rate = (2500 ? 1500) ÷ 2300 × 100% = 43%.
How to understand if RR is high or low
Average retention rate by industry. Statistics for 2018, 468 respondents were interviewed:
Industry Average RR
Professional services — 84%
Mass media: radio, television, newspapers and magazines, online publications 84% Insurance companies — 83%
IT (online services, mobile applications, online schools, software development, fintech)- 81%
TV, Internet, telephone — 78%
Retail trade — 63%
Banks — 57%
The main thing about retention rate
RR is a metric that helps to track what kind of relationship a business has with current customers. The better the relationship, the more often customers make purchases and the greater the profit.Retention rate is associated with other metrics — NPS, churn rate, repeat purchase rate and LTV.
It is possible to increase retention rate if you understand what exactly customers don’t like. To do this, it is necessary to conduct research of the target audience, surveys, in-depth interviews. Then, based on the data obtained, it is necessary to formulate hypotheses about how to improve the customer experience and how this may affect RR, and test these hypotheses with the help of marketing mechanics
How to increase retention rate
Even if you have a high customer retention rate, you can always try to improve it. See if you have tested all the techniques from our list of tips:
1. Launch promotions. For example, discounts are a good motivation to come back and make another purchase. Offer customers a bonus from a partner, come up with a game or a quiz with gifts.
2. Give up complicated registration forms and a long order process. The customer should be able to quickly log in, if necessary, and place an order. Offer one — click registration, set up authorization via social networks and mail, enable autofill of some fields — for example, with the name, address, phone number of the buyer. Also, do not collect information that you do not need. For example, it makes no sense for a cloud service to request the user’s location, this will only lengthen the path of a potential client to the application.
3. Make part of the product free. Open a part of the product for review, give a test period, make a demo account or offer the user a part of the functions for free. A potential client will be able to see how the product works, and during the test period he will learn how your company will help his business or in meeting his personal needs.
4. Take care of the user’s convenience. It’s not just about the interface of a website or application. Improve the service, find and fix problems, offer different delivery and payment options.
5. Remind about payments. Use any opportunity to remind you of yourself, but do not overdo it. Customers will appreciate the care, not the annoyance.
6. Develop communication channels. Come up with unique content: useful newsletters, life hacks, instructions, video courses. This can increase the brand’s expertise in the eyes of potential customers and help users solve their problems.
7. Set up a referral program. Come up with a promo code for each client that will give him a discount for the friend he brought.
8. Collect feedback. Buyers should feel that the company needs them, that their opinion is important and valuable. Ask to leave a review after the order.