“Profitability is the sovereign criterion of the enterprise.” – Peter Drucker
Profit isn’t inherently evil.
Yes, many companies trumpet profit as a critical measuring stick and utilize it to help determine both tenure and success, but popularity alone doesn’t make something bad. In this case, quite the opposite. Without profit, there would be no growth.
Success requires profit, but how hard we choose to squeeze to gain every last dime must be balanced against competing factors such as social responsibility, the quest to provide undeniable value, and critical recognition for the teams who move us forward.
A company’s profit and loss statement (P&L) is its report card. This document provides an objective view of how well the needs of the company are being met. If profit is a top metric, this report is essential.
Considering this, I’m amazed how many business leaders in companies of all sizes either pay minimal attention to their P&L or possess little understanding of what they are reading.
In today’s installment of the Fast Five series, which provides quick, actionable advice for growing leaders, we offer helpful tips and best practices for supercharging your P&L review. Enjoy!
1. Read Your Report Card.
“Many small businesses would rather face an angry barbarian horde than tackle their cash flow statement.” – Nicole Fende
Imagine a child who pays no attention to their grades, but hopes for a free ride to college. How about a salesperson who chooses not to review their pricing prior to submitting a crucial proposal? Though good fortune may intervene, it is more likely both situations will end badly.
How is this different from a leader who fails to spend the time needed to understand their business? Yet, a shocking number of managers, many of whom face profit-based performance reviews and promotions, neglect to make the P&L review a priority, and an alarming number of small business owners ignore it entirely.
In some cases, a detailed P&L review is simply not part of the training or culture, while in others it is viewed as a nonessential task easily set aside for more urgent matters.
If these results truly impact our success or failure, we must ensure they are understood.
Commit 30 minutes per month, every month, to this task. Train others to do the same. Your future decisions will be better informed, and the answers you uncover will save more time than you spend.
2. Begin with the Bottom Line.
“Business is all about solving people’s problems – at a profit.” – Paul Marsden
Most managers read a P&L from beginning to end, just as they would a book. People do this with stories so they can enjoy twists and be surprised by the ending. When reviewing performance, however, the goals are not the same and therefore require a different approach.
Begin with the profit line, typically found at the end of the report. Working backward rather than forward will have you asking questions from the right perspective. Knowing where you are makes it easier to figure out how you got there.
3. Organize and Prioritize.
“Beware of little expenses. A small leak will sink a great ship.” – Benjamin Franklin
Every dollar counts and every line item matters. Small issues today, much like the proverbial pebble in our shoe, have a tendency to become big problems over time. At some point, we will need to stop and relieve the pain.
At the moment, however, we must prioritize. In most cases it is simply not feasible to resolve every problem in one swing. Instead, focus upon those items having the highest combination of urgency and importance. This may be a trend observed over several months or a single large expense.
Often, but not always, the greatest dollar variances will highlight the most critical issues and therefore provide a reasonable starting point. Remember that percentages can be deceiving, but dollars frequently bring the truth to light.
If you remain unsure of where to begin, use this simple test. Ask yourself which issues, if resolved, would make the others easier or irrelevant. This is where you should start. These answers will help guide you to where your efforts will make the greatest impact.
Take a few minutes to prioritize as you work through your review. This will ensure you receive the greatest return on investment (ROI) for your time.
4. Ask, Analyze, and Understand.
“The Profit and Loss Statement tells you a lot about how your business is doing. It can also help you to determine ways that you can go about saving money.” – Darren L. Johnson
Diligence, detail, and consistency create positive results. Your quest is to uncover and understand trends and outliers, taking notes as you go. These notes will serve as solid reference in the months and years to come.
Dig in to anything that doesn’t make immediate sense, even if it seems only a bit off. The more completely you understand your results, the more likely you will be able to positively impact them moving forward.
Don’t make the same mistake as many managers who only question items that appear unfavorable. Look into all variances, regardless of direction.
Often one variance will be offset by another, whether now or in the coming months. It is critical to understand the whole picture.
Examining the profit flow of a business is a balance between learning for now and listening for later. Keep this in mind as you complete your review.
Be curious. Ask the question. Ask the question behind the question. Ask until you understand.
5. Improve Your Grades.
“Profit or perish…There are only two ways to make money: increase sales and decrease costs.” – Fred DeLuca
Analysis without action is wasted. Now that you’ve answered your questions, gathered the information, and gained an understanding of what is or is not driving your business, the time has come to do something about it.
At this point, all P&L items will have fallen into one of four categories: revenue enhancement, expense allocation, future follow-up, or non-issue. Update your notes for the latter two, and focus on the revenue and expenses. This is where you will create your biggest wins.
Since expense allocations impact profit on a dollar-for-dollar basis, they are the most common target for improvement.
A company can make significant and potentially immediate shifts in profit through increased efficiencies, software solutions, vendor negotiations, fiscal discipline, and informed awareness.
Revenue wins create topline sales and come from adding, enhancing, or recovering business. They often take longer to implement than expense adjustments, but create a potentially greater win in the long run.
Leveraging your success with one revenue stream may allow you to add supplemental items to support growth. Offering a discount on slow-moving items whose profit margins are notably higher than others may increase sales velocity. Maybe you even uncover the reason an entire category is struggling, and correct the issue, allowing it to grow once again.
Whether you’re inspired by saving or selling, progress is key. If growth is on your mind and there is only one pie of profit to go around, each month you must either eat less or bake more.
Take action. Use what you’ve learned and make something happen. Find your wins every month.
Thanks for reading. If you enjoyed this article, please let us know and be sure to like and share it with your friends.
Fast Five is a series of posts intended to provide quick, easily understandable recommendations and strategies designed to help you more effectively build teams, overcome challenges, and increase productivity.
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