Have you normalised your profit and loss?
I'm talking of course the tradies and builders because I'm Jon and I'm a business coach
for tradies and builders and one of the things I do with my clients
on the Tradies Toolbox coaching program and something you should do as well whether you're being coached by me or not
is to look at the profit and loss report to see how your business is doing.
Now we do all this work on their business and lots of it
is with the aim of increasing profitability,
making more money.
So it's important to check in on how much money we're making surely.
Don't you think? The profit and loss report shows every month or at least after the end of every month how much money came in,
how much money went out and how much profit was left.
We would hope to see some profit every month. We don't always, do we and when we look it's often necessary
to do some normalising. Now I've made that term up, I'm not sure if it's a real term or not,
but you should do it. It's a process your accountant might call adding back if she's doing your tax or valuing your business or something like that.
Or it's similar to that anyway.
We're going to do it to get an idea of how the business is really doing after we allow for extraordinary costs or extraordinary revenue that came in -
Unusual income, unusual costs.
So what we do of course is we look at the income and we say 'Is that normal for this month or is there something missing or is there something extra'
And we do the same with the costs.
We look at the income, the invoiced revenue is what we're looking at. We're looking at invoiced revenue assuming you do your accounting on an accrual basis
which you should be. So we're not looking at whether somebody's paid a bill, we're looking at whether you've raised an invoice,
they may or may not have paid it and that's something we look at elsewhere. So this is about invoices you've raised and bills you've received.
We're not looking about your cash position.
So we're thinking about how normal that income is. If you're a builder, we've got progress payments to consider.
You might have received bills that have been entered into your system for the materials and subcontractors and you might have paid for the labour
for some work you've done on the job but not yet raised the invoice for the progress payments for example.
So that's one example of normalising, we go "Ah, yeah" but the progress payment invoice hasn't been raised yet that will slip into this month
so it's not as bad as it looks, that's kind of what I mean by normalising.
Here's an example the real one. I have a client who's been running a large construction job. They're installing air conditioning
in a new development, the subcontractor into a builder and it's been running for several months as they do.
Every month we have a look at the revenue and the costs and the profit and we consider whether the revenue is coming in at the same rate as the cost of going out
and actually what's happening here is we're expecting that when we finish the job which hopefully is this month,
they'll see a final invoice but no costs going out and they'll see a big lift in their profitability or a noticeable lift in their profitability.
That's what we're hoping for and this is what I mean again by normalising. You can't just take the numbers at face value. You have to think a bit
about what they mean, what those numbers mean.
Recently, of course, I've been making sure to make allowances for JobKeeper. Almost everybody's revenue and profitability has been inflated by JobKeeper
and I find myself all-cash flow payments as well in Australia and if we look at revenue and I know the same is true in New Zealand
and the same is true in the UK.
There have been government stimulus payments that have changed what your profit and loss report and your profitability
would really be and it's important that we look at what your profitability really is rather than imagining that we're doing fine,
when really this artificial boost profitability into revenue is going to end soon.
Although it's real money and you really got it we want to at least in our minds
take it out and say 'Okay if we remove that did we still make profit?'
And if we're not still making profit or we're only making profit because of the government stimulus money
then we need to go and look at why and try and figure out what's gone wrong and what we need to change anyway if we're still trading profitably
after we remove the stimulus, everything's fine and we're in good shape and if not we have to figure out why.
Have we spent more money this month than we normally would?
Have we bought made a big one-off payment? Have we paid upfront for our business coaching maybe,
have we bought a vehicle, something like that. Have we paid all our insurances or all the superannuation payments or something upfront.
And is there revenue that we need to think about account for, payments due next month that kind of thing. So we normalise.
We correct for the influence of extraordinary factors
like one-off expenses and we check how we're trading okay that's the summary
we want to make sure things are going okay. If they aren't, if we're losing money and it's not going to
fix itself next month because that might be what's happening then we need to try and fix the problem.
We need to identify what the problem is and then go and try and fix it.
And the first step of course is being clear that there's a problem
and that looking at the profit and loss and then doing that normalising thinking is where we're going to see any problems
first if we don't have the systems in place yet to measure things on a more detailed level. If we don't have the systems in place
or the job management system in place so we know how profitable each job is for example
then these things are going to show up in the P&L.
So it's a great check to do. If things are okay, we're in good shape,
if things are shifting hopefully in the right direction then something we're doing is having the right effect
and if things are shifting in the wrong direction we're aware of it soon
so we can go and find out what the problem is and try and stop it from happening.
So please do it, look at your P&Lreport every month perhaps just after the end of the month
when you're bookkeeping people or your finance people in-house have finished. Normalise it and see how your business is going.
You might need to set your systems up so this is doable in a meaningful way, that's what my coaching program's for of course,
we're very focused on getting the systems in place
and things working right so that you as the business owner have access
to the information so you can run your business properly and know what to do make decisions
based on proper knowledge. Why don't you check out business coaching, buy my stuff.
My name's Jon, there are two things you can do if you'd like to think about whether you want to buy my stuff or not.
You can book a 10-minute chat with me, actually me and we'll talk about whether coaching is the right thing for you
or you can come to the next Tools Down workshop which is two whole days of fun packed in Sydney at the moment
where I'll teach you my framework and you can use that two days to help you decide if you want coaching or not.
See you later.