If you’re in any kind of business, you need to know your numbers.
If you’re in any kind of business, you need to know your numbers – big and small. By big numbers, I’m referring to top line revenues, expenses, net income, etc. Most startups and early stage companies use QuickBooks or a similar application which will easily provide standard financial statements like an income statement and balance sheet. For most business owners, the income statement is the key financial statement but rarely does it provide the level of detail necessary to effectively manage the business.
Whether inside your accounting system or outside (e.g., Excel or other spreadsheet), you need to be able to peel away the layers. You need to be able to determine where the profitability is coming from – what customers, what projects, what products/services, and what is changing from prior periods. Obviously the type of business you are in will have a great impact on this process so let me approach this from the viewpoint of a service business.
It’s important to know which customers are more profitable than others, especially when it comes time for pricing decisions and contract renewals. Tracking revenues by customer is usually not too difficult since typically you have that level of detail from customer invoicing. And if you have multiple projects within a single customer you need to track to the project level. Most accounting systems will allow you to create a job number which can be used to track projects within customers. For example, to gather revenue detail, you can export the monthly file to Excel and sort by customer and project within customer to get the level of detail needed.
Expense detail is typically a bit more challenging but obviously necessary to determine profitability. If you purchase goods or services directly for a project, you can use the corresponding job codes like in the example above for project revenue. But while this may work for a construction company, most of the expense for a service business is composed of labor. If you are a technology-focused service company, you may build your own time tracking system. However, most companies will find it more effective to purchase a third-party time tracking application. (More on the value of time tracking later.)
When I was at Maxwell Training Centers (Later MedConference, LLC), our monthly process was to close the books, export the revenue and expense detail to Excel and sort the data to arrive at our profitability detail. When we first implemented this system, our income statement had a gross profit margin of 68 percent. Although instinctively you probably have a feel for which customers/projects are more profitable than others, it was eye opening to see that we ranged from 85 to 20 percent. (We actually had a couple that were losing money.)
And though the concept of time tracking makes many of us cringe, the benefits far outweigh the initial negative reaction, which tends to dissipate after a couple weeks of using the system. At Maxwell/MedConference, one unintended benefit of time tracking was we realized our project managers were spending too much time on small graphic design tasks so we decided to outsource that function. Another unintended benefit was related to customer contract negotiation. It’s hard to justify a price increase when you can’t substantiate it. By having the detail to show how the actual time exceeded budgeted time on a similar project put us in the position to negotiate a better price.
The bottom line here is this: You can’t manage what you can’t measure! Determine what numbers are important to your business and put a plan in place to be in a position to analyze them on a regular basis.