When I look at a set of financials, I want to determine within one minute if the company is profitable and if the revenues and expenses are in line with industry standards. So, how do we create such a report?
Start with your chart of accounts
Surprisingly, many companies use a generic chart of accounts. These charts are usually created so an accountant can prepare the year-end tax return. The IRS is looking for bottom-line profits to tax. The expense categories it wants broken out are on the tax return. While useful for calculating taxes, these provide little for management reporting.
While preparing tax returns is one use for a profit and loss (P&L) statement, the management information derived from a properly prepared set of financials is extremely important in growing and improving a lawn care or landscape business. As such, your goal should be to determine your true costs by department within one minute of picking up the statement.
Group revenue by division, service agreement type
The most important revenue in any service business is recurring revenue. In the landscape industry, because most of us run divisions defined by skill set or marketing groups, we keep those as major headings. The trick is bringing the information and related customer payments and accounts receivable over into a general ledger program such as QuickBooks.
By segregating revenues this way, you can determine the type of work you’re doing and how much you can expect to repeat in the future when budgeting.
Group expenses by direct costs, marketing costs, sales costs and G&A costs
Direct costs are associated with putting a technician on the road or your true operational costs. These costs include technician wages, benefits, payroll taxes and uniforms. The cost of the technician’s truck, auto insurance, fuel, materials, etc., are also all direct costs.
Marketing costs include all activity to produce a customer lead, such as advertising in print, online, direct mail, etc. Sales costs are associated with converting those leads into sales. These include salesperson wages, payroll taxes, benefits, sales vehicles and all associated costs.
General and administrative (G&A) costs are those that don’t fit into the categories above. Usually, these costs are known as fixed costs and include the costs of running the office and other management costs.
Importance of gross margins
Direct costs indicate the cost of your operation. The gross margin, or gross profit, is the revenue minus the direct costs. By looking at the gross margin, we can determine if we are operationally efficient. It also tells us if we have done enough revenue volume to cover our nonoperational costs (i.e. marketing, sales and fixed). It also allows us to show a reasonable profit.
Compare results, compute variances
Using the above methodology, you can easily determine your true profitability. You can further benefit by measuring these results against industry benchmarking standards. Many well-prepared P&L statements compare the current year’s results against the prior year for the current month and year to date.
The most successful professionals also create an operating budget by month and measure their actual results against the budget.
Once the one-minute P&L statement has been set up with actuals vs. the benchmark column, it’s important to see how the actual current year’s results match up. I recommend a column showing the variance between the current year’s results and the benchmark selected so you can determine if you’re ahead or behind the “target.” This provides a starting point to ask hard questions about why the company may or may not be measuring up to last year’s performance or this year’s budget.
Producing a one-minute P&L statement doesn’t need to be difficult. General ledger programs like QuickBooks are adapted to generate financial statements that meet the above criteria. A competent CPA can help you set up QuickBooks and take information from your routing program and marry it with QuickBooks to produce the one-minute manager reports.
Featured image: iStock.com/Auris
