What is your P&L failing to tell you?
Part I: P&L Set-Up
In this issue…
TMI? Or, not enough?
446 words, total reading time 2-1/2 minutes
The monthly Profit & Loss statement (P&L) is a business owner’s most important operating report. At minimum, it tells you how much the company sold (Total Income, or revenues), how much it paid (COGS & Expenses), and what’s left over (Net Income).
The goal of a business, of course, is to maximize Net Income (aka Profit).
But a well-structured P&L should tell you more than just how much you sold, and how much you made. It should also help you understand, in broad terms, what you’ve sold – and how operating costs align with revenues. These are details that help you understand where the company can improve, and by how much.
WHAT You’ve Sold
Viewed at a high level, Custom Integrators generate income from projects in three distinct areas:
1) The major components of the solution, which are usually purchased specifically for the project. We call this category Equipment.
2) The wires, cables, brackets and other parts used to connect and install the components. Because these are used on virtually every job, these items need to always be in stock both in the warehouse and on the trucks. We call this category Install Parts.
3) The skilled labor services required to successfully and reliably design, install, connect, program, and service the many components of the solution. We call this category Labor.
In our reviews of hundreds of CI P&L statements, we have seen companies with many more than these three income categories, and companies with only one. We have learned that too many categories makes managing revenues more difficult, while too few doesn’t provide enough information. These three – along with discrete tracking of any recurring revenues – provide a powerful but manageable information set for the business owner to review each month.
HOW MUCH You’ve Paid
The costs of doing business fall into two areas:
1) Cost of Goods Sold – how much you’ve paid for the actual items provided to projects. In our scheme, we track Equipment COGS separately from Parts COGS.
2) Expenses – how much you’ve paid the people who work for you (including any working owners), the physical space(s) occupied by the business, office expenses, and selling expenses like credit card fees, fuel, marketing, and vehicle maintenance.
Again, an organized structure for these expenses will tell you more about company spending, than having a long list of random accounts organized alphabetically. Our expense categories are Compensation, Occupancy, Sales Expenses, & Administration.