On today’s ramble we are going to talk about Finance. I said in the Five Pillars Ramble, you don’t need to be a CPA, but you do need to know some things about Finance.

Today we will be focusing on your Profit and Loss statement (your P&L). Your P&L is a scorecard to see your company’s financial performance for a period of time. Your P&L is one of the core financial reports that you must get comfortable with. So, let’s start getting comfortable.

When to Review Your P&L

You should be reviewing your P&L many times throughout the year. I recommend that you review it monthly, quarterly, and annually. Looking at it with different timing gives you a better picture as to what’s going on.

What to Review on Your P&L

When you review your P&L you need to look for a few things:

  1. Revenue by line of business and total revenue
  2. Gross margin dollars by line of business
  3. Gross margin percent by line of business
  4. Your overall expenses
  5. Your EBITDA dollars (basically your bottom line profit)
  6. Your EBITDA percent relative to revenue

(All of the terms above are covered on the financial terms page.)

Visualize the Data

When reviewing your P&L the best practice is to visualize the data as looking at just numbers is hard to notice trends. I recommend that you take your P&L and build a spreadsheet with some graphs. In my travels within a few different peer group offerings and being around the industry this is, by far, the easiest way to get an idea of what’s going on with just a glance.

For example, I’ve looked at enough graphs and created my fair share of templates for companies to visualize this data, and can routinely dial into some of the core issues with just a couple minute look at the data. Think of your P&L as a treasure map to help you find money in your business. Making a graph just paints a clearer picture.

Basically, if you take your P&L you can graph out something similar to the below:

  • Revenue – Map it by both aggregate and by your different lines of business
  • Costs of Goods sold (COGS) – Map this like revenue in aggregate and by lines of business
  • Gross Margin Dollars – [Revenue – COGS = Gross Margin Dollars] Map this like the two above; both as an aggregate and by lines of business
  • Gross Margin Percent – [Gross Margin Dollars / Revenue = Gross Margin Percent] This tells you how efficiently you’re generating top level margin
  • EBITDA Dollars (EBITDA — AKA as Net Profit in Quickbooks) – This is basically your final profit number before your accountant does their magic
  • EBITDA Percent – [EBITDA Dollars / Revenue = EBITDA Percent] This tells you how efficiently you’re making profit

Once you graph some of these basic things out over time you’ll start to see trends and areas to dig into. Finance is a complicated topic and it’s a thing that I’ll circle back to more than once.

By Adam

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