When I look at a set of financial data, my objective is to determine within one minute whether the company is profitable, and whether the revenues and expenses are in line with standards we’ve created for the pest management industry.
How do you create reports to concisely give you the state of your business? It all starts with your company’s chart of accounts.
Surprisingly, many new clients we work with use a generic chart of accounts, usually created so an accountant can prepare a year-end tax return. But while these charts are useful for calculating taxes, they provide little in the way of management reporting. Follow these four steps to make your reports more meaningful:
1. Group revenues by division.
he most important revenue is recurring revenue. In the pest control business, because most of us run divisions defined by skill set or marketing groups such as commercial, residential, termite and other services, we keep those as major headings. Most routing programs used in the industry allow you to do this. By separating revenues in this manner, you’re able to determine the type of work you’re doing, and how much you can expect to repeat in the future.
2. Group expenses by cost type.
Cost categories include:
- Direct costs are associated with putting a technician on the road, or your true operational costs. Examples include technician wages, benefits, payroll taxes, uniforms, vehicles, and materials.
- Marketing costs cover all activity to produce a customer lead. Examples include newspaper, radio, TV and online advertising, and direct mail.
- Sales costs often are confused with marketing costs, but they are only associated with converting leads into sales. Examples include salesperson wages, payroll taxes, benefits, and sales vehicles.
- General and administrative costs don’t fit into the categories above. They also are known as fixed costs, as they are fixed over several volumes of business. Examples include office utilities, office Wi-Fi, and building rent.
3. Calculate the gross margin.
Revenue minus direct costs will give you your gross margin. By looking at the gross margin, you can determine whether you are operationally efficient. It also tells you whether you’ve earned enough revenue volume to cover your non-operational costs (marketing, sales and fixed), and allow you to show a reasonable profit.
4. Compute variances with standard.
Once the one-minute report has been set up with actuals vs. the benchmark column (either prior year or budgeted amounts), it is important to see how the actual current year’s results match up. To this end, I recommend a column showing the variance. Variances allow you to ask questions about why your company may or may not be measuring up to last year’s performance — or this year’s budget.
Producing a “One Minute Profit/Loss Statement” that meets its objectives using these four steps doesn’t need to be difficult. Accounting programs are easily adapted to generate financial statements that meet these criteria. In addition, a competent certified public accountant (CPA) can help you set up a program and blend it with your routing software to produce one-minute reports.
You can reach GORDON, a managing member of PCO Bookkeepers and PCO M&A Specialists, at firstname.lastname@example.org.