The importance of a monthly P&L statement

In the first part of this series we dealt with the balance sheet ("Understand your financial statements," September, pg. 30), and now we are going to move onto the profit-andloss statement, hereafter referred to as the P&L. I always ask in my classes how many contractors receive a monthly P about 70% of the hands go up. When I then ask how many receive their P&L within 10 working days of the close

In the first part of this series we dealt with the balance sheet ("Understand your financial statements," September, pg. 30), and now we are going to move onto the profit-andloss statement, hereafter referred to as the P&L.

I always ask in my classes how many contractors receive a monthly P&L; about 70% of the hands go up. When I then ask how many receive their P&L within 10 working days of the close of the month, only about 5% of the hands are still up.

The industry average
for net profit is only 3%.

Some contractors may wait as long as another month before they receive their P&L. So that means if we just finished August it would be the end of September before I received my August financial statement. Not real current information to run my business by.

Think about this time gap in these days of costs rising almost every week. Why do I want to wait four weeks to find out if I made a profit? The information needs to be accurate and in a very timely manner. How am I going to know if I need to be working on

something inside my company?

Your accounting people are not going to like me for this statement, but there is no reason that a company cannot have financials completed within 10 working days of the close of a month. It all depends how much em-phasis the owner or manager puts on getting the information. If the owner does not demand timely financials, then guess what will drag out farther and farther for the end of the month.

Let's look at the sample P&L on pg. 22. As you can see, the P&L has five key areas. First is sales revenue, which is simply all the goods or services you have sold in that month or year.

Now from our sales we need to subtract out our cost of sales. Many people disagree as to what should go into cost of sales. For my example, we are only going to put in direct field labor; any parts, materials or equipment; any subcontracts; permits; and any equipment rental. Cost of sales should include things that are directly related to the cost of doing the job. Items such as health insurance, taxes and gas are overhead expenses in our example.

Now we can determine what our gross profit is for our company. This is done by subtracting out cost of sales from our sales, and the number left over would be our gross profit.

Is this what my profit is? No. We still have to subtract the overhead expenses from our gross profit margin and what is left over is our net profit before taxes. This is the only number that matters as this is the money that I get to put in the bank, use to grow my company or invest in anything else. But remember you still must pay state, local and federal taxes on that number.

What should the numbers be? The industry average for net profit is only 3%, not a good number for all the work and time we put into our businesses.

We have made a model for a company that is in the plumbing residential service business. This is the result of taking information from many successful service companies that produce at least a 10% net profit.

Here is how to use the model. As you see, there are the numbers to use as a target in the model and two other columns that say My Target and other that says My Company. Take your current financial statement and enter it in the My Company column; how does it match up against the model company?

Chances are that your numbers are not what they should be. Now you have a benchmark with which to start to improve your company and measure on a monthly basis. Figure out which area you are going to improve and enter your new target number; that is the company goal for the next month.

If you do this on a monthly basis you will see how your company is tracking and improving while generating additional profit to make all the hard work we do worth the time and effort. Remember that this can be a long process and take months to fit inside the model company. Do not get discouraged; keep moving forward.

In the last in this series we will look at ways to increase our cash flow and improve your companies' productivity.