EP38: What do I pay Attention to when reviewing P&L Statements – Domain Magnate

EP38: What do I pay Attention to when reviewing P&L Statements

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In the 38th Episode of the Domain Magnate show deals with understanding P&Ls (profit and loss statements). Michael Bereslavsky shows you how to read a profit & loss statement. In this episode, we’ll look at an example of a small business and see how you can learn more about it. This episode is intended for beginners mostly, new buyers and investors, and it’s aimed at online business owners and investors.

HOST BIO:

Michael Bereslavsky is the founder and CEO of Domain Magnate. He’s been involved in various internet-based businesses since 2004 and quickly graduated from building, promoting, and monetizing websites to buying and selling them. With over a decade of experience, Michael and Domain Magnate has managed 300+ successful deals.

SCREENSHOTS:

SKIP TO THE GOOD PARTS:

  • 00:12 – 03:21 What is a P&Ls (Profit and Loss statement) and review of simple P&L sheet
  • 04:42 – 08:04 Revenues sources
  • 08:08 – 09:34 Inconsistencies
  • 10:17 – 11:38 Reviewing expenses across the domain
  • 11:43 – 14:00 Development and support

SHOW TRANSCRIPT:

00:12 Hello, and welcome. This episode is about understanding and reading P&Ls, profit and loss statements. And at the end of this, you should learn what a PNL is, how it works, and really be able to understand how to read it and also what to pay attention to. So, you can learn more about the business you’re reviewing, and this is intended for beginners mostly, new buyers and investors. First of all, what is a P&L? A P&L is a profit and loss statement, which for online business just lists the different sources of revenues and expenses and that allows you to get a quick look of what this business is all about. And so … let me show you a quick example, and this is one of the smallest businesses that we have in Domain Magnet; a website called Arabic-keyboard.com, and you can visit it to have a quick look. So, by looking at this PNL, you can quickly learn a lot about the business.

01:30 First of all, you can see that there are two sources of income, Amazon associates and AdSense, Google AdSense. And then you can see that the expenses are the domain registration, the hosting, and some content and links. That’s the first thing that you can see and then the net profits. So, you would see that most of the revenues coming from AdSense while a little bit extra is from Amazon, and then you can also see that there’s some fixed hosting costs, fixed domain registration, cost of $10 every month. Like the hosting is $5 every month, and that the content and links were done one and a half years ago.

02:16 So that’s the most simple kind of PNL that, that you would have and that gives you a very quick idea, quick snapshot of the business. And that’s an important thing that you can do is this is look at the … let me show this quickly. So, with Google sheets what you can generally do is for example, select the last three months profits, and then it will show you the sum, or if you click, it will show the average. So, you can see the average is $50 in the last three months. You can do the same for example, for 12 months. So, for the last 12 months, you can see here, it says count 12, so12 months and the average is $57. So that’s good to know. Now that’s the most basic profit and loss statement there is. And this kind of gives you an idea of what the lines of what everything is about.

03:24 Now, next, let’s look at a more complicated example and then we’ll see what we can learn from it and you can actually learn a lot from a P&L You can learn a lot about the history of the business. You can understand the potential risks and potential things to pay attention to. You can understand how it works from looking at expenses and sources of income. And there is a few more things that you should keep in mind that are a little bit more advanced that we’ll cover in a bit.

04:01 So let us look at another P&L statement that is a little bit more advanced. And here it is, this is one of our portfolio businesses and you can see the URL is hidden so that they can preserve the privacy. So, let’s dive into it and see what we can see. First of all, we are looking at their revenue sources and you see they have AdSense, Stripe, PayPal 1, PayPal 2 and some affiliate income, we also have the different operating expenses, the domain registration which is like $10 per year, the hosting bill, which is about $35 and then we have the Stripe refund fees and PayPal fees and some APIs, development and also content and links and paid ads. And so here is how you can actually learn from this; by looking at, at how all these different lines interact with each other.

05:24 So for example, you might notice that, PayPal one (1) at some point they were discontinue or unknown or revenues in PayPal one (1) from January, 2000 and the PayPal two (2) was added… started generating more and more avenues beginning June, 2019. So, what that tells us is probably the PayPal’s was switched and that usually means that maybe the business was sold and this is actually a true, because this is a business we own. So, I know about it and we actually acquired it in June, 2019. And as we acquired it, we put our PayPal instead of the previous owners PayPal. And so that’s something you can actually deduce quite quickly from the P&L. So that’s quite neat, right? And you can see that the previous PayPal was discontinued, so it probably had some subscriptions that were incoming until then, then you can also see that most of the revenues coming from Stripe, and it’s been like that throughout the history of the business.

06:40 You can also see it that it’s been very consistent. The revenues appear to be very consistent. The expenses seem to be quite consistent and consistency is great. It’s nice to see in a business, especially when you have it over a period of more than two years. Let’s see what else we can learn, another thing that I often pay attention to when looking at P&L’s is seasonality. Is this business seasonal? And by seeing if there are some periods during the year that the revenue is substantially lower or substantially higher. So, here, for example, we see higher revenue in past couple months, but that wasn’t like that last year. Yeah. So, last… kind of a mistake here that [mumbling00:07:42]. So, the last year the revenue was not higher in February and March. It was kind of similar and the year before as well, it was similar so that’s not seasonal. So, we don’t see any repeated patterns that repeat consistently over a year. So, it doesn’t look like there is any seasonality.

08:08 Then next we can look at some inconsistencies or irregularities. So, there is a few numbers that come to mind. For example, this one, you can see that in December, the, AdSense income was only $341 compared to close to a $1000 in the months following it and in the previous months. So that means something happened. Maybe the owner was testing, removing AdSense, replacing it or something like that. Maybe there was some temporary AdSense compliance issue or a ban something like that. So that’s something you can usually investigate and ask the owner. Another inconsistency that comes to mind here is around this period you can see that in October, November, December, the revenue in PayPal account was lower. It was like 800, 600, 900 compared to the months before and after it was more than a thousand or 1500. And that’s also interesting. So potentially this is because the owner decided to use PayPal less and redirect more sales to Stripe because you can see that the Stripe sales were consistent.

09:34 Let’s see what else we can learn from here. Also, of course, we should pay a lot of attention into the general revenue trends and year’s the general revenue trends are quite consistent, it’s being leveraging like three, $4,000 per month for a couple of years. And then recently it went up to $5,000 and more recently even six and $7,000 in revenue. So that’s pretty good to know, but that’s also interesting. It’s helpful to understand what caused this increase. And this case I can tell you that this was caused by improving technology, because this is a sound business and by increasing traffic.

10:17 So next let’s have a look at expenses across the domain. The hosting expenses are consistent, but then we have a Stripe refunds and something that jumps to mind here is this number. So, this numbers are a little higher than the other numbers, in July and August 2000 the business had more than a thousand dollars in Stripe refunds. So, we would like to know what caused that and also, we see some negative Stripe reforms, which means that refunds were reversed. So that’s something to also look into and find out about. And in this case, I can tell you that this was due to a technical error on the site that people got charged twice. So, there were higher refunds.

11:09 So as you can see a little of those things, you could kind of deduce from the P&L So the PNL tells you a lot of information. It can tell you a whole story. Same. You can see if PayPal refunds, PayPal funds inconsistent. There is also some API video IP stock, all expenses seem consistent a little bit higher recently, which seems reasonable because there are more revenues. Well, next, we can look at development and support we see there are some costs from over a year ago, but there are no costs recently. So that could be a little suspicious because you’d want to find out what happened because all SaaS projects technological projects, they usually require some treatment maintenance. So, you might want to check, is there really no problems recently, or maybe the owner just didn’t include the details in the spreadsheet.

12:23 Also, you can see there are some content and links expenses, this one is really important to understand because you see, they are not quite consistent. So, they were like 700, 600 in February and March, 2019. And then some more in October, 2019, a little bit in February, and then like April, May, June. So, it seems that occasionally the owner was paying for some more content and expenses and links to be added and what you can deduce from that is that you could probably expect something similar. You could probably expect that you might have to spend like more or less a similar amount, 700, 600 every six months or so. And it seems that recently there were no expenses for links and content and finally, you can look at the paid ads here, the last column, and this shows you basically that they probably started using paid ads around March, 2000 and they tested a little bit, and then it looks like it probably worked well. So, they test a bit more and in September, October, 2000 it was higher, but then recently it looks like it was discontinued. So that kind of tells you the story that they experimented, but then decided not to continue using it because it probably wasn’t as profitable and that’s about it.

14:00 And finally, what you can also do is look at the averages. So, if you for example, you can look at the revenues over the last three months, and that’s been $5,902, or the average of the past 12 months, which would be $4,747. And so, these are basically some things that you can learn from the P&L. You can also look at the totals, but the totals are usually not as interesting. Although we can notice that the past two (2) and something years the business earned $114,000 and it had $18,000 in expenses. So, you can see from that, that the expenses are roughly like 10% of the revenues.

15:16 So that’s it, that’s the review off of the P&L. And what we’ve learned from that is that the P&L is very important. It’s very important to look at this carefully because it really tells you a story. You can learn a lot about a business from just reviewing the P&L. What I usually pay the most attention to in P&L is looking at revenue sources and all sources of expenses, and then looking at trends. Do you see specific expenses or revenue sources going up or going down? And what does that tell you and is that consistent or is it a fluke. Understand the whole business history and trends of the past years or whatever long you have the P&L form and Domain Magnate we always ask to see previous history. So, sellers, owners often only show the last 12 months or the last six months. And we always ask to see as long as possible revenue history, because we can always learn more from it.

16:27 Also pay attention to trends, to expenses see if there is any seasonality, pay attention to any irregularities or inconsistencies with numbers. And you can also understand some things involve risks from looking at the P&L’s. For example, if you see there is only one major source of revenue that would be potentially a risk if something happened, or if you see that there is some inconsistent source of expenses that sometimes can be quite high. So that’s something to pay attention to. Additionally, when I look at the P&L, I often ask myself, how reasonable is it? How reasonable are those expenses and those revenues compared to the traffic compared to the business? So, for example, quite often you see that owners, especially for smaller business owners, don’t put most of the expenses in the P&L sheet. So as the buyer or investor for you, it’s important to understand better. What are some extra expenses you might expect for this business? If it’s a technical business, it might be some support or coding, programming development expenses. If it is a content business, you’ll probably expect to update content quite often, or maybe even pay to build some links, any content site needs frequent content updates. If it’s an eCommerce business, there would also be specific expenses relevant to that industry.

18:16 So now that you have a pretty good understanding of what a P&L is, how it works, I suggest that you look at more websites and look at more and more different P&L’s and see what you can learn from that. And the more experience you gain, the faster you’ll be able to catch on different trends and inconsistencies and problems as well as opportunities. Thank you for watching and wish you good luck in your next acquisition.

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