Ben Franklin, on a hundred dollar bill, smiles, having recieved a kiss on the forehead
This time let’s focus on the Counting of Money.
A most valuable tool is the Profit and Loss statement. Based on a useful myth the P & L pretends that two things are true.
- All money owed to the company has been collected.
- All money owed by the company has been paid.
In that regard, P & L’s are never completely correct. However, they are very useful tools because they can determine.
- Revenue status, often, divided by profit centers.
- Cost of sales expense, often, divided by profit centers.
- General overhead, costs that cannot be allocated to specific jobs or sales activities.
Revenue minus Cost Of Sale equals the Gross Margin and tells us if the fee we charge for the work we do is enough. It is also a strong indicator of company productivity and when accompanied by percentage indicators (all off of total revenue) can quickly tell us the areas to focus on for positive change.
Gross Margin minus General Overhead costs indicates Net Profit and Net Profit is the money we use to pay expenses on the Balance Sheet.
A word about attitudes toward profit: It used to be that owners viewed profit as “the money the government taxed”. It was the advice of many accountants to manipulate the figures to show a loss and therefore avoid taxes. The problem with that old view and practice is that those who do so find it difficult to get lines of credit from banks or suppliers. Perhaps most importantly there is no clear focus on the real measure of the company’s success or failure to perform.
I am constantly amazed how many small to medium businesses do not have timely monthly P & L’s. To a lesser degree, how many companies with monthly P & L’s do not review them with the management team on a consistent basis.
How can you see where the rocks or open seas are if you don’t check your position?
Other financial measurement tools of important value are:
- Accounts Receivable Ageing Report – Who owes you money and for the longest time.
- Accounts Payable Ageing Report – Who do you owe and for how long?
- Cash flow projections– When is money coming in and when will it be going out?
- Balance sheet – What is the Changing Status of long-term debt, receivables, payables and inventory?
- Job Costing – What is the gross margin dollar and percentage amount of the most recent work we have done?
Timeliness, Accuracy and Active Review of the financial status of your company are among the most important counting you can do.
Next – Measuring Marketing
