Building Your Monthly P&L: Revenue, COGS, and Operating Expenses Explained
You made $8,000 in sales last month. Your materials cost $2,400. Platform fees were $560. Shipping supplies ran $180. Studio rent: $400. You spent 120 hours working. How much did you actually make? Most makers can't answer this question. Here's how to build a P&L that shows the truth.
The Profit and Loss statement (P&L, also called an income statement) is the single most important financial document for understanding your business. It answers one question: Did I make money this month, and where did it go?
Most handmade makers track revenue obsessively but ignore the expense side. They think "I sold $8,000" means success. But after materials, fees, shipping, labor, and overhead, that $8,000 might be a $200 profit—or a $1,500 loss. This guide shows you how to build a monthly P&L that reveals true profitability.
The P&L Structure: Five Core Components
The P&L Formula
Component 1: Revenue (Total Sales)
What it is: All money received from sales before any deductions. This is gross revenue—the total dollar amount customers paid.
Common Mistake: Including Shipping Revenue
If you charge $50 for a product + $8 shipping, your revenue is $58 total. Many makers mistakenly separate "product revenue" from "shipping revenue." Don't. It's all revenue. You'll subtract shipping costs later in COGS.
What to Include in Revenue:
- Product sales (Etsy, Shopify, in-person)
- Shipping fees collected from customers
- Custom order deposits (when you complete the work)
- Wholesale orders
- Tips/gratuities (if applicable)
What NOT to Include:
- ✗Refunds (subtract from revenue)
- ✗Sales tax collected (you're just holding it for the government—net it out)
- ✗Loans or personal money you put into the business (that's capital, not revenue)
Component 2: Cost of Goods Sold (COGS)
What it is: The direct cost of producing the products you sold. If you didn't sell it, it's not in COGS (it stays in inventory).
COGS Formula
COGS = Beginning Inventory + Purchases − Ending Inventory
Translation: You count the value of materials you actually used to make products you sold this month—not everything you bought. This is called accrual accounting, which differs from cash accounting.
COGS Includes:
Direct Materials
- • Raw materials (clay, fabric, wood, beads, etc.)
- • Components (findings, hardware, zippers)
- • Consumables used in production (glue, thread, finishes)
Direct Labor
- • Your time spent making products (priced at your hourly rate)
- • Employee/contractor wages for production work
Packaging & Shipping
- • Boxes, mailers, tissue paper, labels
- • Actual shipping costs paid to USPS/UPS/FedEx
- • Packing tape, bubble wrap, stickers
Platform/Payment Fees
- • Etsy transaction fees, listing fees
- • Shopify transaction fees
- • PayPal/Stripe processing fees
Example: Calculating COGS
Sarah makes pottery. Here's her November COGS calculation:
If Sarah sold $6,000 in products, her gross profit is $6,000 − $3,870 = $2,130.
Component 3: Gross Profit
Formula: Revenue − COGS = Gross Profit
Gross profit is what's left after you cover the direct cost of making your products. It must cover operating expenses (rent, marketing, software) and leave room for net profit (your take-home pay).
Healthy Gross Profit Margins for Makers:
Rule of thumb: If your gross margin is below 40%, you'll struggle to cover operating expenses and make a profit. Raise prices or reduce COGS.
Component 4: Operating Expenses
What it is: Costs required to run the business that aren't directly tied to producing a specific product. These are "overhead" or "fixed costs."
Common Operating Expenses:
- • Studio/workspace rent
- • Utilities (electric, internet, phone)
- • Marketing & advertising
- • Photography equipment & services
- • Accounting software (QuickBooks, TrueCraft)
- • E-commerce platform subscriptions (Shopify Pro)
- • Professional services (CPA, lawyer)
- • Insurance (liability, property)
- • Tools & equipment (not consumables)
- • Education & training (courses, conferences)
- • Bank fees & merchant account costs
- • Administrative labor (bookkeeping, email)
NOT Operating Expenses:
- ✗ Raw materials (those are COGS)
- ✗ Shipping costs (COGS)
- ✗ Platform transaction fees (COGS)
- ✗ Production labor (COGS)
- ✗ Personal expenses unrelated to business
- ✗ Inventory purchases (asset until sold)
- ✗ Loan principal payments (balance sheet item)
- ✗ Your personal salary/draw (comes from net profit)
Component 5: Net Profit (The Bottom Line)
Formula: Gross Profit − Operating Expenses = Net Profit
Net profit is what you actually made after all expenses. This is your take-home pay (before taxes). If it's negative, you lost money that month.
Healthy Net Profit Margins:
Real Example: Complete P&L Breakdown
Emma's Candle Business - November 2024
| REVENUE | |
| Product sales | $9,200 |
| Shipping charged to customers | $680 |
| Total Revenue | $9,880 |
| COST OF GOODS SOLD | |
| Materials (wax, wicks, oils, jars) | $2,100 |
| Labor (100 hrs × $22/hr) | $2,200 |
| Packaging & shipping | $720 |
| Etsy/Shopify fees | $620 |
| Total COGS | $5,640 |
| GROSS PROFIT | $4,240 |
| OPERATING EXPENSES | |
| Home office rent allocation | $350 |
| Marketing & ads | $400 |
| Software subscriptions | $85 |
| Photography & editing | $150 |
| Utilities | $120 |
| Insurance | $75 |
| Total Operating Expenses | $1,180 |
| NET PROFIT | $3,060 |
Gross Margin
42.9%
Net Margin
31.0%
Effective Hourly Rate
$30.60
Analysis: Emma's Business is Healthy
Gross margin of 42.9%: Slightly below ideal for candles, but acceptable. She could raise prices 10-15% or reduce material costs to hit 50%+.
Net margin of 31%: Excellent. She's keeping nearly a third of every dollar as profit.
Effective rate of $30.60/hr: Above her target of $22/hr. She's efficiently pricing her time and products.
How to Build Your Monthly P&L (Step-by-Step)
Track All Revenue
Export sales reports from Etsy/Shopify/Square. Add up all sales including shipping. Subtract refunds.
Calculate COGS
Materials used + labor hours worked + packaging/shipping + platform fees. Use the formula: Beginning Inventory + Purchases − Ending Inventory.
Calculate Gross Profit
Revenue − COGS = Gross Profit. Calculate gross margin % (Gross Profit ÷ Revenue). Target 50%+.
Add Up Operating Expenses
Review bank/credit card statements. Categorize every expense as either COGS or Operating Expense. Sum up operating expenses.
Calculate Net Profit
Gross Profit − Operating Expenses = Net Profit. Calculate net margin % (Net Profit ÷ Revenue). Target 20%+.
TrueCraft Automates Your P&L
Manually building a P&L each month takes 3-5 hours of reconciliation, categorization, and calculations. TrueCraft automates the entire process:
- Auto-sync revenue: Pulls sales data from Etsy/Shopify automatically
- Calculates COGS: Tracks materials consumed per product sold using your BOM
- Categorizes expenses: Links to your bank, auto-categorizes transactions
- Generates P&L: Real-time monthly/quarterly/annual P&L dashboard
- Alerts you: "Gross margin dropped to 38% this month—review pricing"
Resources
SBA Accounting & Bookkeeping Guide - Federal Small Business Administration's comprehensive resource on managing financial statements and profit and loss reporting.
AICPA Small Business Resources - American Institute of Certified Public Accountants guidance on financial statement standards and P&L preparation.
SCORE Mentoring - Free business mentors who specialize in helping makers understand financial statements and profitability analysis.
IRS Publication 587 - IRS guidance on calculating business expenses and costs, essential for accurate COGS and expense tracking.
See Your Real Profitability—Automatically
TrueCraft generates your monthly P&L automatically from sales and expense data. Know exactly where your money goes and how much you're actually making—without manual spreadsheets.
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