Understanding the Financial Story
A profit and loss (aka P&L) statement is one of the three financial statements of a business. It's a crucial financial tool that provides insights into the financial performance of a business.
For film production companies, a well-structured P&L statement is essential to track revenue and expenses accurately and understand the financial story of the business. By categorizing revenue and expenses into detailed accounts, filmmakers can gain valuable insights into their business operations and make informed decisions.
The Purpose of a Profit and Loss Statement
A P&L statement is a financial document that summarizes the revenues, costs, and expenses incurred during a specific period—usually monthly, quarterly, or annually. Its primary purpose is to determine the net profit or loss generated by the company during that period. By tracking revenue and expenses in detail, filmmakers can gain a deeper understanding of the financial health of their business—and identify its opportunities.
Here are the steps to set up a comprehensive P&L statement for a film production company.
1. Establish Revenue Accounts
Revenue accounts track the income generated by the film production company. It is essential to create revenue accounts that align with the specific activities of your business. For example, you may have revenue accounts for different types of films, such as brand films, testimonial films, documentaries, or commercial advertisements. By creating detailed revenue accounts, you can track the contribution of each film type to your overall income.
2. Determine Expense Accounts
Expense accounts capture the costs incurred by the film production company. Establishing expense accounts that provide meaningful insights into the various expenditures related to your business operations is crucial. Consider creating expense accounts for categories such as pre-production expenses (script development, casting, location scouting), production expenses (crew wages, equipment rental, set design), post-production expenses (editing, sound design, visual effects), marketing and promotion expenses, overhead expenses (office rent, utilities), and any other relevant cost categories.
3. Use Industry-Specific Account Categories
Working with an accountant with industry-specific expertise is beneficial as they can utilize specialized account categories tailored to the film production industry. Generic account categories may not provide the level of detail required to understand the financial dynamics of your business accurately. Collaborating with an accountant familiar with the film industry ensures that your P&L statement reflects the unique revenue streams and expense categories relevant to your business.
4. Track Activity and Assign Transactions
To create a comprehensive P&L statement, diligently track all the revenue and expenses associated with your film production activities. Assign each transaction to the appropriate revenue or expense account. For example, if you receive payment for a brand film, allocate the revenue to the corresponding brand film revenue account. Similarly, record each expense in the appropriate expense account to maintain accurate financial records. A bookkeeper can do all of this for you, as well.
5. Review and Analyze the P&L Statement
Regularly review your P&L statement to gain insights into the financial performance of your film production company. Analyze the revenue and expense trends to identify areas of strength and areas that need improvement. By closely examining the P&L statement, you can make informed decisions to optimize your business operations, allocate resources effectively, and maximize profitability.
Partner with a Pro
Setting up and maintaining a P&L statement can take time and effort, especially if you are unfamiliar with accounting practices. Aardvark helps film production companies correctly set up their P&L statement, guide industry-specific account categories, and ensure accurate financial reporting.
To Sum It Up
A well-structured profit and loss statement is vital for film production companies to track revenue and expenses effectively. Filmmakers can gain valuable insights into their business's financial story by creating detailed revenue and expense accounts, using industry-specific account categories, and diligently recording transactions. Regularly reviewing and analyzing the P&L statement empowers filmmakers to make informed decisions and drive the success of their film production company.