Profit and Loss Statement – If it matters, measure it!
“What gets measured, gets managed.” This sentence is a quote by Peter Drucker from his 1954 book titled, “The Practice of Management.” Many leaders believe this is one of the best business quotes of all time, and we agree! (GrowThink) Especially as it pertains to a Profit and Loss statement.
What does it mean to “measure”? It means what the Shark Tank has tortured business owners with on every show, “Know your numbers”! But which numbers? Well, the ones that matter, of course – and that part varies by company.
Yes, you need to know your financial numbers but not just the money – that’s important – but you need to know ALL the numbers. For example, your revenue is below normal levels; why? You can’t just know that it’s low, but you have to know which revenue segment is down. Where do those particular customers find you? How is web traffic? Is there a new competitor in the market? What else could be the cause?
For most small business owners, these answers are not available as easily as they should be. The owner may have a gut feeling or a guess, but the cold hard data, such as that found in a Profit and Loss Statement, has never been tracked. If this is you, you are not alone!
Virtually all entrepreneurs and business owners start like this. And that’s why business failure statistics are so terrifying. According to Dun & Bradstreet, 91% of businesses fail within ten years of opening. The main reason – business owners are running their businesses blindly!
What to Monitor
Anything that you see as crucial in your business, you should monitor. You may already do this but don’t realize it. This involuntary tracking could range from a simple taste test to make sure the sauce comes out correctly, to a formal quality control process to ensure the electrical sockets are in place correctly.
The bottom line is if it matters, you monitor it, and you already know how to do it. The key here is to add more data to what you watch so that you will have the ability to pivot quickly and monitor activity as markets shift. For example, a Profit and Loss Statement.
Business owners get into business to solve a problem, follow a passion, and to make a living. Entrepreneurs have the passion, dedication, and tenacity to overcome any challenge that comes their way. Most of the time, owners float on the clouds of cash flow waiting periods and keep their doors open relaying on the use of a credit card to fill in the gaps.
Many business owners have little time to (or hate to) sit in an office and collect data, but the consequence is there may not be a business to manage for long. Also. many small businesses use software like Quickbooks Online and expect that because the bank feed shows in balance, that the books are clean and in good shape. Quickbooks Online is an incredibly powerful tool and one that we recommend to our clients, but only if they know how to use it properly – many don’t!
In the weeks since COVID-19 shut down the US workforce, we have helped nearly one hundred companies apply for the Payroll Protection Program. While the pressure is on high to get the applications in quickly, it is also imperative that financial reports are correct. For one, to afford their employees, they don’t want to get underfunded, but two, they don’t want to be overfunded and be at risk of not having the loan forgiven. What we found was honestly, not shocking, but eye-opening – the “bigger small businesses” measured what mattered to them (labor costs) and were able to complete their applications quickly. Their Profit and Loss statements were up-to-date and easy to locate for reference.
Why? They knew their exact gross payroll costs and submitted them within hours. The “smaller small businesses” had to redo many of their 2019 books to properly account for the true costs. Many reported net payroll vs. gross. The result of this was the “larger small businesses” were able to complete their PPP loan applications quickly. Hence why they received funding within two weeks. The “smaller small businesses” had to pay for massive clean-up, then submit their applications. Subsequently, they get funds in mid-May vs. early April. Sadly, some have even had to close their doors for good before they ever got the loan submitted.
Why hire a professional CFO?
What about in a non-COVID environment? What is the benefit of having a professional hourly Chief Financial Officer (CFO) not only complete your bookkeeping services but provide your monthly financial review meetings, time and money analysis, and strategy? It all comes back to measuring what matters.
If you have your income statement split out properly, you would know that your typical electric bill is $150 each month. Suddenly you get a $400 bill, so you go to your invoice and notice that the meter is broken. You call your electric company and correct the mistake. Had you tossed this invoice in with the other utility codes, you may have missed it as the water and steam invoices fluctuate each month. This oversight could have cost you hundreds of dollars for months!
Let’s look at revenue as another example. In the last two months, you notice that your bank account balance is low. You go to the income statement and it shows your sales are down 20%. Everything is labeled as “sales,” so you can’t tell if it’s in food revenue, retail, or alcohol sales. Had you been properly reporting your revenue on a category basis, you would be able to
see that online retail orders are down.
You went to your website to find that the PayPal payment link is disconnecting. All the while, people have been wanting to buy but are not able to. The chances are good that this sort of data can be seen within a day or two. That is, if the reports are set up properly vs. waiting two months to find the problem.
The same concepts will hold in every area of your financial statement. By correctly categorizing, labeling, and measuring your revenue and expenses, you will be able to pick out anomalies and dig a little deeper to determine a problem or opportunity. statement, determine any areas that need improvement, and modify the current year to the new format. By doing this, a new picture of your business will be visible where time and money are abundant.