“Numbers are the language of business” is a famous adage. This is not to discount company culture, extraordinary products, or brand-building exercises and how they contribute to success. However many small companies don’t review the numbers often enough to help them make meaningful decisions. If you are not measuring your success, how do you know if your goals are being met?
Let’s examine what to look at, how often and why.
Sales: you can make a lot of mistakes if you have enough profitable sales to try new things and cover the expense even if it doesn’t pan out. So look at these reports monthly:
- Sales by customer this year vs last year for the month and the year to date. This tells you who is falling behind last year’s sales. Attrition is one of the sneakiest ways to lose sales volume. By reviewing this monthly, no one gets so far behind that it’s a big surprise and hard to restore. Staying in touch builds lasting relationships. It’s always easier to grow your existing customer sales than to find new business.
- Sales by product this year vs last year for the month and the year to date. Similar to the above, in that you can see trends in your product sales that can influence where to put emphasis. If a traditional best seller is falling behind, can promoting it help? If a new item is trending in the top 80% of your sales, then are you promoting it enough to new and existing customers? You’ll also find slow-movers that need to be killed off. (See the accompanying article by Anita Comisky, our favorite Quick Books Expert)
Cost of Goods Sold: profitable sales come from understanding your incremental costs of producing those sales. COGS = Raw Materials including freight to get them to you, Packaging plus freight, and labor including taxes and benefits. Fully loaded COGS is a great way to understand breakeven, but it’s a different metric.
- Use purchase orders to order your materials. Use the price you paid last time or call for an update. Do not accept unauthorized price increases. If your PO is accepted by your vendor, that is a contract.
- When price increases are presented and accepted, change your COGS spread sheet to reflect them. If possible, have your COGS in your accounting system for the most accurate COGS information at your figure tips.
Profit and Loss Statement: depending on your size you’ll want to have your CPA close out your month quarterly or monthly. They will also make inventory adjustments and update your balance sheet. You’ll want to specifically watch:
- Promotions, Free Fills, Slotting: While these are distasteful, they are often a required cost of doing business. Track them separately on your P&L by including them in your chart of accounts. do not report temporary price reductions above the line in Income. Show this below the line in Expenses. You’ll have a better handle on the cost of promotions and budgeting for them in the future.
- Marketing: Trade shows, collateral material, advertising, and PR are expenses that you can vary to build your brand awareness. When you identify new channels, you will likely support your brand by adding marketing expenditures in these activities. Track them in your P&L so you can evaluate your ROI.
Budget: your business plan should have 36 to 60 months of sales and expense projections. Use the first 12 months as your budget for start-up purposes. This gets entered into your accounting system so you can easily run reports against it. In subsequent years, use the prior year to build the upcoming year’s budget taking into account trends, new channels, and other growth strategies that you want to measure. Also enter that into your accounting system. Now you can run your monthly P&L against last year and against budget.
Cash Flow: Give your budget to your accountant and they will give you monthly cash flow estimates needed to reach your goal. They’ll ask you questions about collections and accounts payable that will determine incoming and outgoing cash needs. Have them do this for your 12 month budget and then for a rolling 8 – 12 week period every month. You’ll easily see what funding you need to attain your goals.
Deb Mazzaferro can help you run a profitable business, Deb@CoachMaz.com 727-258-8015.