Digging into Profitability

If you're paying even the tiniest bit of attention to your books, you are familiar with your Profit & Loss statement: namely, how much you are making or losing over a period of time (whether monthly, quarterly, annually, etc.). It's possible that you have broken out your income and expenses to great detail, but there is still additional information you could be missing out on.

There are methods by which you can measure the profitability of different segments of your business, depending on your industry and the composition of your company. That can allow you to focus on the most profitable aspects of your business, while identifying areas for growth. Here are some of the most common ways we dig deeper into profitability on behalf of our clients.

Job-Costingjob-costing

Job-costing is great for businesses who tend to work with a small handful of clients at a time, where the projects are long-term and clients aren't necessarily repeat customers. Job-costing is typically associated with construction, but can also be applicable for service-based industries that work on projects, such as large-scale marketing or software integration firms. In job-costing, each expense and revenue deposit is connected to a specific job, and P&Ls can be run by job, in addition to being run for the company as a whole.

Location-Based

Sometimes a company's business occurs in more than one place. Obviously, there are businesses such as dental practices, who have multiple offices. If those are managed independently, it makes sense to want to know the profitability of not just the practice overall, but of each individual location.

Location-based profitability tracking also works very well in the retail and service sectors. Anywhere one business has more than one location, they should be tracking how much money is location is making (or losing) for them. Additional education or possibly replacement might be necessary for General Managers who are not pulling their weight.

restaurantsFirms with Partners

Sometimes there are businesses in which multiple individuals work within one location, but functionally act as separate business entities. In some law firms, for example, partners operate within the same space cooperatively, but it is still valuable to see who is bringing in the most revenue for the firm, and where expenses are being allocated. There are also certain health clinics or spas where multiple partners may offer complimentary services, and it is vital to track the revenues from each avenue.

Class-Tracking

Some companies have what are really multiple businesses operating as one. For instance, a farm might sell directly to restaurants in one area, sell to grocers in another, and operate a produce stand from which the public may purchase directly. Assigning a class to each transaction (again, both revenue and expenses), can allow the farmer to see the profitability of each segment. Class-tracking is also great when selling both directly and for resale, as sales tax is only applicable on certain sales.

General Rulesclass-tracking

If you decide to implement additional levels of profitability tracking within your business, it is vital that you follow a few basic rules.
1.) Be consistent. Have an assignation for every transaction, every time. Otherwise, your data is inaccurate, and therefore, meaningless. (And it's been a waste of your time to do the tracking you have done.)
2.) Have clarity. Know exactly what your system will be for assigning transactions and have it written out, for either yourself or your bookkeeper. Make sure everyone who touches your financials is on the same page with the system.
3.) Be timely. We are always proponents of keeping financials up-to-date. However, this gets even more crucial when you need the additional level of detail required for profitability break-outs.

If you are interested in what profitability tracking might look like for your company, contact us for a free consult. We are happy to go over your financials and suggest ideas for growth and improvement.


Living a Lie: The mistakes that make entrepreneurs go broke

"You have to spend money to make money."

"Maintain the image of success."

"Fake it 'til you make it."

There is an ideal of the successful entrepreneur as a jet-setting globetrotter, someone living high on their quickly-amassed profits earned through their brilliant business insight.  We want the overnight success and rock star-status of Richard Branson.  (Comparatively, Larry Ellison, who has over eight times the net worth of Branson, took a less meteoric path to wealth, and is relatively unheard of.)

The unfortunate side effect of our idolization of instant-millionaire entrepreneurs is that many have come to associate that glamorized lifestyle with proof of product value.  In other words, "If I look and act successful, people will assume I know what I'm doing and hire me for my services!"

Here are the four most common ways entrepreneurs blow money on an image.

"I've gotta get my name out there."

Advertising is great.  Advertising is essential.  By all means, advertise!  However...

Don't blow your budget on advertising.  While seeing your company on a billboard or hearing your name on the radio is a great feeling, don't throw your money away on that illusion of the "big-time" without knowing for sure that you are going to get a good return on your investment.  This is a mistake we have seen time and time again.

I once personally witnessed a (now closed) local small business flush away thousands of dollars on a radio ad which they were convinced would result in a flood of customers to their large weekend sale.  They scheduled additional staff, opened early, and...no one showed.  The ad was ineffective.  In their frustration and desire to not have their money wasted, they played the ad on loop inside the store (i.e., the place where customers weren't), succeeding only in driving their employees crazy.

For the majority of small businesses, big-budget ad campaigns are not worth it in the early days.  A local tv spot might make you feel like a celebrity (for better or for worse, given the quality of most local tv ads), but it cannot match the per-dollar effectiveness of a decent website, solid social media engagement, and positive word-of-mouth.

"I have to have a nice place to meet clients/customers."

The information age has transformed the world, and the way we do business in it.  Meeting clients over coffee or lunch is a perfectly valid option, as is selling products online without a physical storefront.  However, many entrepreneurs still seem to feel as if their business is less legitimate without a physical location.

Rent on offices and storefronts is a significant monthly expense, and that does not include furnishings, utilities, etc. Having a separate workplace to travel to on a daily basis has mental benefits in improving productivity, but it is not a cost to be considered lightly, nor is it a business essential nowadays.  A gorgeous office with a big mahogany desk is a nice long-term goal, but it is not worth putting your company in the red.

"Yeah, I think I've got a place in the business for you."

We have written before on the dangers of expanding too early.  However, this becomes doubly dangerous when owners begin creating positions for the sake of hiring friends and family.  Middle management, and other positions which are not directly involved in revenue generation, are rarely necessary in a young company.  It is good to be surrounded by people you like and trust, but, until your business has enough sustained profitability, employing people for positions you really can't support is like inviting people onto a raft with a hole in it.  Everyone just starts sinking more quickly.

"The company's buying dinner tonight."

This is the big one and, really, the issue from which all the others stem.  It appears that, since the invention of commerce, owners have fallen prey to the temptation to treat the company as a personal piggy bank, not realizing that they are essentially robbing themselves.  Personal expenses being run through the company tanks profits, and can become risky from a tax perspective.  (Inaccurately deducting too many things as "business expenses" sends up a red flag to the IRS.)

In some cases, a failed understanding of accounting reports results in owners bankrupting their own companies.  For example, Owner's Draw does not show up on a Profit & Loss report.  So, when an owner views the Profit & Loss report, they might see that the company is very profitable, and think everything is fine.  Meanwhile, their overspending is bleeding the business's Retained Earnings dry.  When an unexpected setback occurs, they suddenly realize they're out of money and the company goes belly up.

So what should you do?

Though stories of those who got rich quick are fun, it has to be accepted that, for the majority of us, success will be a longer journey.  Just as we individuals must live within our means, so much our businesses function within their budgets.  Slow and steady wins the race, a penny saved is a penny earned, etc.

"He worked hard and was patient, and eventually earned wealth and a comfortable lifestyle," might not be the most exciting story, but it beats that tired tale of the guy who tried to have it all right away and lost everything.


Stop Eating Frogs

Mark Twain famously said, “Eat a live frog first thing in the morning and nothing worse will happen to you the rest of the day.”  In recent years this has become a particularly popular sentiment amongst entrepreneurs, used as a reminder to not procrastinate in completing disliked chores.  Small business owners typically have to manage so many different aspects of their company, it's inevitable that there will be some tasks they dread.

For many, their "frog" is accounting.

But, here's the secret...for some people, frog is a delicacy.

We may be in the minority, but, at The Bookkeeper, accounting and finance aren't just something that pays the bills.  We actually find a lot of it fun.

Here are a few of our services which, though business owners typically find distasteful, we really enjoy.

You know the only thing more fun than reading a collections procedure manual?  Writing a collections procedure manual.  It combines several of the things we love, like research, technical writing, and custom-tailoring business practices to an individual company.  What's not to love?

Of course, we've heard some people refer to research as "boring" or technical writing as "tedious".  But we feel the same way about SEO optimization and, apparently, some people enjoy that.

Budgeting

Budgeting seems to have a negative connotation for a lot of people.  A budget is seen as something constraining.  But we think budgeting is awesome.  You get to look at all your revenues and expenses, and figure out where you can save or earn more money.  Who doesn't like having more money?  A budget lets you make plans and take steps to achieve your goals.  Not knowing your budget is like driving blindfolded.  Maybe exciting for some, but too risky for us.

 Debt Repayment Plans

A lot of people who are in a great deal of debt don't like to think about how much debt they're in.  Of course, ignoring a problem doesn't make it go away.

For business owners overwhelmed by debt, figuring out a way to repay it all is too big a frog to eat.  Much easier to just make the minimum payments and try not to think too hard about those rising balances.  Fortunately, we love writing debt repayment plans.

Like so many problem, debt seems a lot bigger when you're in the middle of it.  That's why we enjoy taking an objective, mathematical look at the problem, and coming up with a tangible, step-by-step solution to eliminating it.  And it is so exciting to show someone how they can, often without even spending additional money, be debt-free and have savings built up in, frequently, as little as five years.

 Profitability Analysis & Pricing Strategies

Some people may be put off from some aspects of accounting because of the math involved, particularly when it comes to things like calculating gross profit margins.  We at The Bookkeeper are huge fans of math, perhaps because of its consistency and objectivity or, perhaps, as the great philosopher Cady Heron stated, "Because it's the same in every country."  (Yes, both Mark Twain and "Mean Girls" quotes in one article.  Small business accounting can be very culturally relevant.)

Math is especially useful when it comes to looking at which products or services provide higher revenues or greater returns, and where prices can be raised to improve profitability.  Using a little bit of math and research to make more money, without having to sell more or perform more work?  That's fun.

These are just a few of the services we provide for our clients, not just because our clients find them difficult or loathe doing them, but because we actually do find them interesting.  Where the client sees a live frog, we see a perfectly seared filet mignon.

If there's some chore in your business which you simply despise completing on a daily basis, whether it's finance-related or something else, consider whether it's worth it to you to pay someone else to eat that frog.

You're in business for yourself, so why do something you hate?