Most small business owners do not understand bookkeeping, Quickbooks, contribution margin, or cash planning, so they shy away from learning how to use their results to improve the business. Yet when small businesses fail, it’s because they run out of cash. Why does this happen, and why do owners allow cash shortages to develop in the first place? Too often, it’s because they don’t try to understand their numbers.
They assign someone else to “keep track” of the numbers. Unfortunately, bookkeepers are not planners. Bookkeepers look backward, not forward. Owners are the only ones whose job includes using past performance to improve future results, but they usually do not know how.
The owner is the expert on what the business does, spending up to 80 hours per week to make sure the business has effective operations, and maybe even spending some time on getting new customers. Small business owners typically do not make it a priority to understand their numbers well enough to predict their future. Short term demands make future planning seem like a low priority. Then they run out of cash!
Fortunately, it is not difficult for small business owners to understand their numbers well enough to plan even without learning software (e.g., Quickbooks) or bookkeeping. Three techniques are all they need. First, require the bookkeeper to export the monthly Quickbooks Profit and Loss Report to an Excel spreadsheet with one column for each month of the year. Second, have the bookkeeper reformat the data in Excel into an Income Statement with a reasonable number of revenue and expense categories (see below), and for each category heading show the “% of Revenue” in that line. Third, study where the money goes and create ideas to change those percentages.
Let’s look a little deeper at each of these techniques. First, the Internet has dozens of entries telling the bookkeeper how to export data from Quickbooks to Excel.
In the second task, you are making the Quickbooks data more useful by reducing the number of entries to a manageable number. For revenue, you should have a line for each product type. Even in a job shop, you can categorize your jobs into types. The next main category is variable costs, or COGS. Your lines for variable costs will be labor (and associated payroll tax and possibly benefit costs), materials, subcontractors, shipping, and sales commissions. The labor line will include labor costs devoted to production, with nonproductive labor hours shown elsewhere as overhead costs.
The last major category is fixed or overhead expenses, those that stay the same regardless of production volume. Here is where you will invent headings to group costs by type, so the number of lines is manageable. Ten categories should be sufficient. For example, nonproductive labor/tax/benefits, salary/tax/benefits, facility costs (rent, maintenance, utilities), computer costs (hardware, software, maintenance), vehicle costs, office expenses (include phone and bank charges), professional services (accountant, legal, consultants), marketing costs (include travel and entertainment, professional licenses and conferences and subscriptions), and perhaps the old favorite miscellaneous – but try to keep this minimal.
The key line is “contribution” (to cover overhead and provide profit) or operating margin. This is revenue minus variable costs. As a % of revenue, this line must exceed the % of revenue for total fixed/overhead costs, and that difference will be your profit as a percent of revenue. See the next article for examples.
The third technique is analyzing the results. This is the owner’s job, and no one else’s. Up to this point you have simply been telling the bookkeeper to present the data in a more useful way. In the next article, we will discuss how you can use this data to improve your business.
Numbers are the way we keep score. Without them, you cannot tell if you are winning the game or losing, until it is too late! Small business owners can avoid a cash shortage without expertise in bookkeeping if their results are presented in a way that enables planning, using percentage of revenue and contribution margin.
Does this seem do-able so far? Does it seem worth doing?
Tom Gray is a management consultant focused on small business, a Certified Turnaround Professional (CTP), and a SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. See www.tom-gray.com
