This article will explain how to build a profit and loss and why it is important for PMs. PnL is a financial statement that summarises the revenues, costs, expenses, and profits/losses of a company during a specified period ot time. It is also used by finance and executives but product managers or directors to evaluate the financial performance of products. 

Personally, I believe that a true product manager should be responsible for the financial results of the product which means that she/he should own the PnL. Why? Because many organizations are siloed and each department only cares about its own metrics e.g. sales about the funnel conversion and closed deals, marketing about the leads, engineering about the velocity etc. Product manager is a person that balance all those metrics – she/he lays out the product strategy and choose features that one hands will help the commercial teams to meet revenue targets but also make sure that those features are not over engineered and that the cost will not exceed the potential gains. And that is what a PnL is about. It is a financial representation of your product strategy:

1. Planned and realised sales targets – revenue
2. Cost of acquiring customers (CAC) – how much % of the revenue is consumed by sales and marketing teams – how effective your sales process is
3. Production cost – how many engineers and infrastructure is needed to deliver the product
4. How much profit is left at the end of the period – month, quarter, year etc. 

Pic 1 – Example PnL (own resource)

In many organisations the ownership of the PnL is centralised in the hands of CPO or VP of Products and there is a great reluctance to delegate this responsibility to PM level. This can work well when an organisation has one product and PMs are responsible for specific components of this larger platform. As soon as you have a complicated portfolio with multiple products, centralising the financial responsibility may result in your product managers not really understanding the business impact of their product decisions. 

To read more about this I strongly recommend reading this article by Lex Sisley 

I learned to start creating a PnL at the very early stage when I founded my first startup. Financials were challenged by every investor who could easily find gaps in my plans. Some ideas may look good in your head. Still, when you map your development and market launch costs with potential revenue, you may realise that you will need to burn cash for months or at least occasionally accept months with heavy losses. Are you prepared for it?

PnL forces us to analyse those risks and be very specific. Therefore, it can help small startups to avoid going out of business. If you, for example, start a small plugin company and forget about one cost item like ads or your market launch slips for a month or two, you may run out of money even if there is a demand for you product.  

The same goes with building new features and versions of mature products. If your organisation is serious about doing product discovery that engages a whole product trio – PM, Designer and Lead Engineer – the result of the opportunity assessment should always be a feature idea that consist of the business impact  – how many new customers it is supposed to bring, how many existing clients is suppose to retain or how it is going to improve their satisfaction etc.  This will be reflected in your PnL. 

Pic 2 – Opportunity Solution Tree (author Teresa Torres)

Having product portfolio view in your PnL is very important. While your CFO may be more interested in the overall financial results of the entire company and cashflow, breaking PnL down into products level may show you that some products generate high margins where some others are barely covering the cost or even generating a loss. Creating a portfolio PnL can be painful tough if you have shared teams and infrastructure as you need to break down their cost into products. You may experience pushback, but it is still worth doing periodically. 

More about portfolio management in our articles 

• How to maximise value of your product portfolio
• Can we make a reliable revenue forecast a new product
• Selecting new products for development  

You can start by using a ready to use excel template.  

1.Learn to put together planned revenue (number of unit sold x price) and cost broken down categories

2. Calculate profit margin of the given product – percentage of the revenue retained 

Points 1 and 2 are already a great starting step 

Pic 3 –  Product financial model (PDMA)

At the next stage you can learn how to differentiate operational (OpEx) and CapEx (capital expenditure which are investments – into equipment, hardware, intellectual property). It is important to understand that CapEx will be represented in your your operational budget as amortisation and depreciation, but we will cover this in another article. It is also important to partner here with your CFO as legal amortisation rules vary between countries. Also, LLC and INC companies in many countries are obligated to publish their financial statement that can ONLY be prepared by the finance team. In other words, your PnL cannot replace financial analytics and reporting and is only an additional perspective you need as a PM.

If you have ambitions to take on senior product role in audio companies or think of founding your small startup, understanding the finance is very important. PnL is a basic financial statement that can be used to manage results of your product or portfolio. Don’t forget to work with your CFO – don’t treat him/her as a enemy but a very valuable partner. 

Join our class Finance for Product Managers if you want to master creating PnL and using other financial metrics.

Thank you for reading. Written without AI:)