Most small business CEOs have their bookkeeping fairly well in in order. But, are you using the numbers in your accounting to make key strategic decisions about your business?
Sally has four stores on one accounting system – the numbers are well kept for each store and for the company as a whole. She has managed all of her stores pretty well with traditional accounting for years – she can track all of the revenue daily and check the cross margins. But she can’t print a profit and loss statement (P & L), and even if she did, she wouldn’t know exactly how to use it.
As far as Sally knows, she sees a P & L once a year when her accountant sends it along with the tax returns at tax time. In that case, the accountant has worked hard to show the minimum profit possible for tax reporting purposes. But Sally must have done better than that!
WHY A P & L?
In her CEO Mastermind group, Sally learned from her peers several benefits of actually reviewing a P and L monthly:
* She will see her actual profit, not just work on growing margins
* She can analyze expenses on a regular basis and control costs more effectively
* She can make strategic decisions for the future based on present income and expenses
But the real issue is this: creating what we call a Financial Dashboard. If Sally can create a P & L for each division, or product category, or what we call a profit center, then she can know precisely how profitable each profit center is.
Are you actually making money with each of your product lines or divisions? When we analyzed Sally’s company in this way, we found that one of her products was actually losing money every time it was delivered!
So we went to work with Sally to set up this dashboard and began to review it together monthly. A trend over three months showed that, indeed, that division was in trouble. Sally cut back on staff and super-charged a marketing effort.
We began looking at the P & L weekly, and saw an immediate trend upward. By the end of the second month, the division was breaking even. By the end of the third, it the bottom line profit for that division was 5%
WHAT SHOULD YOU DO?
Many small business owners do not manage their companies this way; they’re “too busy doing the work.” Well, time to change, my friend. This single simple management technique could change the entire outlook of your company, as it did Sally’s.
Create a P & L for each profit center (each distinct division, product or service in your company) and review at least quarterly – monthly if possible. The dirty little secret is – most accountants know about this but do not get their clients to do it – they are focused primarily on “tax accounting.”
What we need as business owners is “strategic financial management.” Try it today!