Now that the Financial Year end has come and gone, I am in full swing meeting with clients about their figures, and discussing how things have gone for the year.

I thought I would set out the key figures I am always looking at on a client’s Profit & Loss and Balance Sheet, starting in this article with the Profit and Loss.

Firstly, bring it in, put your ego back in your pocket and stop telling people that you run an $X million business, or employ Y number of staff, focus on the important things, and ensure that the risk you are taking on actually results in the financial rewards you deserve. If it doesn’t make dollars, it doesn’t make sense. Is it worth it? Go on, think hard about that, I dare you. If it is not, look hard at the items I have set out below, get your house in order, or straight up get a job.

I am a methodical guy, and for me, the only place to start is at the top and work your way down. The headline figure that is too often the star of the show is the Turnover figure. Sales is often the significant driver of many people in regard to their business. I am only a poor simple bean-counter from the Shire, but I couldn’t give two f’s about the Sales figure if the business is not profitable and in a good cash flow position. Yes, a certain level of sales is required to allow a business to even have a break-even point, but work on the things below and it will be amazing how the Sales figure is not the most important figure on the P&L.

What is without doubt the most important figure on the P&L is the Gross Profit figure. This is one of the crucial lessons Big Phil taught me - if you haven’t made it here, you are pushing shit uphill (ok, so maybe he didn’t put it quite so eloquently…).

Strongly impacting the GP figure are your purchases/materials and labour costs. The Purchases/Materials figure tells you if you are marking your product up enough or charging enough for your service.

Wages tells you how lean you are running your business. When going through a growth period, there are always going to be points where your business is loaded with staff to allow for the anticipated sales growth to be produced or serviced. Equally, when growing, there should also be times when the place is heaving, all hands are on deck and the staff are stretched to capacity while reinforcements are recruited. This should mean that when undertaking a 3 – 5 year trend analysis, wages should be reeled back in at certain times, especially if the growth has slowed, by choice, due to market conditions or otherwise. If this is not the case, then your staffing levels have most likely been too high throughout the review period. Labour is so expensive in Australia that the importance of keeping a close eye on this cannot be overstated.

When reviewing your overhead expenses, go through line by line and focus on the items that are prominent expenses as a proportion of sales. Anything that can be trimmed or cut altogether, don’t hesitate – trim or cut and get on with it. Here are my tips for keeping your overheads tight:

• Don’t buy phones, laptops and unnecessary gadgets for all and sundry
• Don’t replace non-core items unless necessary (eg don’t replace the phone system just because the contract was paid out – if the equipment is in good working order, push it and get another year or two our of it)
• Don’t buy vehicles or finance other equipment unless you really need them, and have properly considered it, not just because you had a good month and have a couple of bucks in the bank
• Don’t rent bigger and better premises unless you absolutely need it. If you are running out of space, can an off-site solution be used until cash flow allows for it? Can the current space be better used? Bear in mind that a fit-out and relocation is always more expensive than you initially think

Now, my favourite part – the Net Profit… This and the Gross Profit are really the first two items that I will focus on, these will tell me how carefully I need to examine the rest of the P&L. When considering the Net Profit, adjust for what the market salaries of working directors should be, not how much they are actually drawing as wages. This will get to a true result. This adjusted Net Profit figure is your Return on Investment.

The market rate of salary is what you could go out and achieve as a salaried employee. The Adjusted Net Profit figure will tell you if the financial investment, the risk, and general worry is actually worth it. Have the guts to look this in the eye and ask yourself if it is sufficient. 

As Richard Feynman said “the principle is that you must not fool yourself – and you are the easiest person to fool”.

I’m TC, and that’s my 2 Cents.