Reading a Profit & Loss Statement

Being financially literate is a big advantage as you progress through a company. This post from Will Larson walks you through Hashicorp's S-1 filing and explains the types of insights you can gain from a very dense document fill of numbers.

I recommend reading the whole article, but here are some of my main takeaways.

New business vs renewal / expansion:

what percentage of revenue is coming from renewing customers and what percentage is coming from new business? The core of a good SaaS business is a healthy renewal rate: you need a much smaller sales team to drive revenue growth if the product does a good job of retaining existing revenue.

What is the relationship between revenue and the cost of servicing that revenue. Are there economies of scale once you pass a certain threshold?

What’s really interesting is places where cost growth is accelerating or decelerating relative to revenue growth. For example, license revenue grew by 96% in ‘20 to ‘21 and costs grew a bit slower at 82% in that same period. This means they’re achieving some economies in their growth.

dig into cloud services revenue and costs, where revenue only grew 75% from ‘20 to ‘21 while costs grew 246%. Not understanding the strategic role of cloud services, the P&L doesn’t tell a particularly optimistic story about its trajectory.

interesting that growth in support costs outpaced support revenue growth in ‘20, but not in ‘21. Understanding why support costs grew more slowly in ‘21 than in ‘20 will lead to a valuable insight into how that business truly operates.

Is there anything surprising in the numbers? Is the company 95% sales and 5% R&D? In this case, G&A was larger than expected:

I personally find it a bit surprising that “General and administration” (G&A) is a larger operating cost than “Research and development” (R&D) and would love to understand that a bit better.