Tradies, have you Normalised your Profit and Loss?
Tradies – Have You Normalised Your P&L (Profit And Loss)?
One of the things I do with my clients on the Tradies Toolbox Coaching Program (and you should do it too) is look at the Profit & Loss report to see how the business is doing.
We do all this work on their business, lots of it with the aim of making more money. It’s important to check in on how much money the business is actually making – don’t you think?
The Profit And Loss report shows every month how much money came in and how much went out and how much profit remained in the business.
We would hope to see profit every month (but we don’t always) and when we look, it’s often necessary to do some normalising.
It’s your process, your accountant might call adding back if she’s doing your tax or valuing the business.
We’ll do it to get an idea of how the business is really doing – after we allow for extraordinary costs or extraordinary or unusual income.
The importance of normalising your Profit And Loss Report
Basically, we look at the income – (invoiced) revenue is what we see, assuming you do your accounting on an accrual basis. Whether your customer has paid that invoice yet or not, is not what we’re looking at yet. So, we’re not looking at your cash position. We then think about how normal that income is.
If you’re a builder, where are you at with progress payments:
- Are some due?
- Did some slip into the next month or slip into this month from work done in the previous month?
For example, I have one client who’s been running a large construction job (installing air conditioning in a new development, subcontracting to a builder) – it’s been running for several months, as they do. And every month we look at revenue and consider whether the revenue is coming in at the same rate the costs are going out. It finishes this month, and we’re actually anticipating that the final payment will come in and all the costs (except labour for this month) have gone out.
Recommended Reading: Know Your Numbers (Episode 1) – Why It’s Important To Know Your Numbers
That’s what I mean by normalising – you can’t just take the numbers at face value, you have to think a bit.
Recently, I’ve been making sure to make allowances for the JobKeeper and cash flow boost payments. If we look at revenue and gross profit and net profit and some payments have been received, they inflate the profitability artificially, don’t they?
It’s a true reflection of the profitability of the business because the money really came in, didn’t it? But it doesn’t help us understand if things are going okay, so (in our heads, at least) we track it out.
If we’re still trading profitably, we’re in good shape and if not we have to figure out why:
- Have we spent some money this month, more than usual? (Bought a vehicle, paid something all at once, something like that).
- Is there revenue we need to account for payments due next month?
That sort of thing.
So we normalise, we correct for the influence of extraordinary factors like one-off expenses and check how we’re trading.
We want to make sure things are going okay – if they aren’t, if they’re losing money, and it’s not going to fix itself next month, we need to try to fix the problem. Or identify the problem then go and fix it.
The first step is being clear that there’s a problem, isn’t it? And the P&L (normalised) is where we’ll see it if we don’t have the systems in place (yet) to measure other things.
It’s a great check to do. If things are shifting (hopefully, in the right direction) something we’re doing is having an effect and if things have shifted in the wrong direction we’re aware of it soon, and we can identify and fix the problem.
So please do it – look at your P&L report every month, normalise it and see how your business is going.
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See you later.