Happy February! (No worries, I’m not going to tell you that a month of 2022 has already passed – I know you know.)
I recommend Profit First to all my clients. It’s an easy read, especially if you don’t love tracking/looking at the numbers.
- A former client recently shared that she’s reading it (YAY!!!) and it’s changed how she looks at her numbers.
- A long-time client recently shared that she’s picked it up again.
- Personally, I re-read several chapters annually.
After all, the job of a business is to be profitable.
When I review a P&L (ours or a client’s), I look at the profits from two angles:
- What are the profits?
- What are the profits excluding the owner’s pay?
As small businesses, there’s typically no board of directors, no one with input on what we pay ourselves as owners.
- Some owners take very little pay out of the business, preferring to take the majority as distributions (these affect the Balance Sheet, not the Profit & Loss Statement) or even to leave funds inside the business.
- Other owners prefer to take the majority of profits as a salary.
For example, a business could show 5% profits on its P&L, yet when you take out the owner’s pay (just the owner, not the team), profits jump to 45%.
If we didn’t drill down on the 5% profit percentage, we could think that the business isn’t faring well, when that’s not the case. The owner made a decision to show low profits in exchange for taking a high personal salary.
Same example: 5% profits. This time, however, when we take out the owner’s salary, profits increase to only 7%. It’s an entirely different scenario.
There could be many explanations. A likely one is that revenue dropped and they kept shelling out too much for ongoing systems and other expenses.
Or they could have had some significant one-time expenses.
This second scenario would require more investigation – while that sounds like a lot, we’re talking a few minutes of drilling down into the numbers.
The important thing is to review your finances and understand what the numbers are truly representing – and to do it throughout the year, not only during tax season.