Profit and loss statement
Profit and loss statement is the basic game report. It shows how much you managed to sell, what is costs, and what profit level you managed to generate. You might decide to compare last days or months, and use filters limiting information to a specific customers or products.
Going from the top of the report you can see the following metrics:
- Sales, or sales income before discounts. For each product it equals to the number of sold items multiplied by the product base price.
- Discounts are the price reductions you've applied for specific customers. It is the sum of expenses related to the bonus program, and individual customer or customer group discounts. Discounts might be given only to different businesses in the game, so this quantity is relevant only to manufacturers and distributors. For these business forms the actual income is...
- Sales after discounts, i.e. sales after subtraction of the discounts. If you discount your prices, Sales (before discounts) is an artificial quantity specifying how much income you might have generated, if you did not use price reduction mechanisms.
- Manufacturing cost/purchase is production cost for producers, and overall purchase cost to other business forms. For manufacturer the production cost is a sum of all resources costs necessary to produce a specific quantity of products, according to the cost profile of the subcategory (visible in the Sub-categories characteristics report), multiplied by the quality rate, and reduced by a resource purchase discount depending on the manufacturer scale (the discount increases with growing scale of the business, so it reflects negotiation power of the manufacturer). For distributors and retailers the purchase cost is the sum of purchase prices reduced by acquired discounts, and multiplied by purchased quantities.
- Logistics covers the cost of delivery of the product to customer and storage. In the game it consists of two parts - direct logistics costs, related to delivery (increasing with fuel prices) and storage (increasing with increasing stock level), and "customer" logistics, growing with the number of customers to which the products are delivered. It reflects the costs of customer service.
- Gross profit 1 is the Sales after discounts reduced by the variable costs, i.e. manufacturing/purchase and logistics. Gross profit 1 is one of the most significant metrics in the business: if it's not positive, no growth in sales would cover the other expenses. On the other hand, if we have high fixed costs (next ones to be described), positive gross margin 1 gives a chance to reach sales high enough to generate at least zero profit.
- ATL (Above The Line) is the first group of marketing expenses. These are the "brand image" expenses that are to improve band awareness, perception, and finally influence the intent to buy among the shoppers. To achieve it usually TV/radio/outdoor or the internet are the media used for communication. In the same group we have company PR investments, and general price communication (brand independent). The latter are significant for retailers as it influences primarily the shoppers choice of where tu buy. It has limited significance for distributors. ATL expenses are not visible to independent retailers as they cannot invest in marketing in the game. ATL investments have moderate, but long-term impact on the sales results - even if you switch off the expenses, the market remembers communication from the previous periods (however, it slowly forgets).
- BTL (Below The Line) is another group of marketing expenses, but at the point of sales, so much closer to the actual customer. BTL is to influence the visibility and display quality at the stores to increase intent to buy once the customer is in store. In the game BTL is a shelf share-related fee. The higher the (customer-specific) investment in BTL, the higher should get the shelf space. This is how the passive businesses operate (existing in the market since the opening) and active businesses, that decided to leave automatic shelf allocation on. The others allocate shelf space manually and might (but do not have to) consider the BTL-related income. This is why in the case of active businesses you should monitor the BTL expenditures effectiveness, and negotiate the shelf space in exchange for money.
- Gross profit 2 is Gross profit 1 reduced by marketing expenses, i.e. ATL and BTL. It is the last entry in the Profit and Loss statement which might be allocated to products. The following fixed costs are related to maintenance and usual business operations.
- Maintenance of fixed assets are all costs related to utilization of the stores/plants, equipment, offices. Repairs, components replacements etc. can be found here. This entry applies to all businesses in the game.
- R&D (Research and Development) is a cost of the market research necessary to introduce new product to the market. It's an expenditure of the businesses that decides to launch a product, so usually the manufacturer. Exceptions are the own brand products, when the R&D expenses are paid by the brand owner. For manufacturers, also upgrading production lines generates R&D costs.
- Calibration of the production lines is related to the necessity to switch the line for different products manufacturing. It's nonzero whenever the number of manufactured products exceeds the number of available production lines.
- Paycost are all the staff-related costs. They grow with the business scale, and with the team of players managing the business.
- Other income reflects investment of manufacturers or brand owners in BTL on their product in your store, so it should appear whenever they decided to pay for improving visibility of their products in stores. Brand owners would see this investment as an expense in the BTL line of the profit and loss statement. You would see the part they invested in your stores. How big this investment is, and what shelf space they expect in return should result from your settlements. It is an additional income line, shown just before EBITDA, as selling display space is outside your core business activity (unlike trading products).
- EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) is the gross profit 2 reduced by the fixed operational costs, i.e. maintenance, R&D, calibration and paycost, and increased by Other income. It equals the cash you generated in the period (or by how much you reduced your cash record if it's negative).
- Depreciation. Every time you make significant investment to buy fixed assets, like new production line, opening new store you need to spend significant amount of money. It usually exceeds strongly the amount of cash you are able to generate within one period. Instant allocation of this as a cost would be a massive distortion of the result. Since you are going to exploit the new assets for a longer period you cannot state that the results on the day of investments were so bad, and that you generated so painful loss. This is why we use depreciation in the statement. It simply divides the overall investment into the number of periods covering the anticipated usage time of the asset to generate income (i.e. to manufacture using the production line or sell from the specific store). The depreciation time is here arbitrary and equals in the game 180 periods. Over this period the maintenance costs are quite low. After the depreciation is over - the maintenance gets more expensive as you need to repair and replace components of your asset more often.
- Fixed assets sale. Buying fixed assets leads to immediate reduction in cash, but the cost is spread over the long depreciation time (without further impact on cash). Selling fixed assets is i principle a reversed operation, but it might happen that on sale the entire buying cost hasn't yet appeared in the P&L, as the depreciation period did not pass. We then need to reflect in the "Fixed assets sale" both effects - income on sale, but also the remaining residual value (not yet depreciated). Let us consider an example. If a production line is bought for 180000, then at depreciation time equal to 180 we are to see everyday depreciation 1000. Let's assume it's then sold after 140 periods. for 9000 (i.e. half the buying price). The generated income would be then 9000, and this is the amount of cash we are going to get. On the other hand, the cumulative depreciation in the P&L is 140x1000 = 140000. It means that the (residual value) of 40000 has not appear yet as a cost. We cannot depreciate it further as the company does not have the fixed asset anymore. The only solution is to reflect the entire residual value (the remaining depreciation) instantly, in the same period the fixed asset is sold. The Fixed asset sale result would be then 90000 - 50000 = 40000. This calculation method indicates that if we sold the production line on the same day we bought it, we'd lose 90000 (buying price 180000, selling price 90000) in cash, there would be no depreciation yet, and the recorded Fixed asset sale result would score 90000 (income) - 180000 (residual value) = - 9000. It's quite important to notice that depreciation and Fixed assets sale do not influence cash directly, but reflect the cash operations afterwards. It is because of depreciation mechanics, that shifts in time the cost vs the actual expenditure.
- Net profit is the overall result of your business reflecting the operational profit reduced by a fair chunk of investments in fixed assets made in previous periods.