Understanding your Profit and Loss Statement

The first article in this series listed more than 25 tactics to increase your business success, all of them based on my experience. I started with nothing and didn’t get to college, so I know you can achieve maximum success, regardless of your education. E-mail me to get the first article (or any of the other articles) in the series. Each takes a closer look at one of the tactics listed in that first article.

Most owners don’t like financial statements, so they don’t look at them. In today’s fast world though, where it’s harder than ever to make a buck, it’s critical that you spend some time on the financial statement. As I discussed in an earlier article in this series about using your flashlight, you should be getting the financial statement by the 10th of the month in order to review and work on improving your bottom line during the month you are now in.

The profit-and-loss statement does not need to be intimidating. In fact, there aren’t more than a half dozen numbers that deserve your maximum attention. Always review it in the context of the prior 12 months so that you are seeing the same month last year and every month up to the current month. Although all columns are needed, the most important places to compare are last year for the same month and the previous month. If you prepare an annual budget, which you should, you would also be comparing to this as well. The numbers needing the most attention, in order of importance, are likely to be these:

Sales – Did you hit the sales you wanted? How did they compare to last month and last year? You will want to consider the number of working days in the month, a few days short or over can be material to results. If you didn’t hit the goals, why not? In many cases, the first culprit is purchasing. If you don’t buy enough, you won’t have enough to sell. In the auto-recycling business, we don’t buy cars; we buy sales, as my good friend Jim Counts says. The next place to look, of course, is sales staff. In most cases, I find yards are not profitable they are selling less than $25,000 per month times the total number of employees aren’t profitable.

Costs of Goods – Most of you treat your purchases as cost of goods sold (COGS). This paragraph is for you. You simply must understand what you need to spend on vehicles to hit the sales number you want based on previous data. If you don’t buy enough, you won’t hit your sales goals. Also consider your year-to-date number, as buying does go up and down, your purchases over 3-4 months must be at the historical percentage to MAINTAIN sales. I am always amazed at the yards that don’t seem to understand that freight costs should be included with vehicle costs for this analysis. I see yards stop their buying out of town because the freight costs are too high, with no regard for what the cost of goods percentage is for the cars themselves. Why do you care if the freight costs from Seattle are $1,000, and the car costs $1,500 with a 33% cost of goods sold percentage? (Meaning it will produce $4,500 in sales). So the car actually cost $2,500, and produces sales of $4,500, or a total COGS of 55%. But they will pay $2,700 for the same car locally, and $150 to haul it, for a 63% COGS. There are other advantages to buying out of your market including seeing more cars and being able to buy the ones you need the most.

Labor Expenses – Compare your labor expenses to prior periods, to understand as a percentage of sales and total dollars. Months with 5 payroll periods instead of 4 will, of course, be higher. How is it trending? In the auto recycling business, I seldom see labor costs much below 20% of sales, but anything over 40% is a danger sign.

Other Expenses – Next review expense items that you have control over, those that are above 3% of sales. There’s likely no need to look at depreciation, utilities, or rents, for instance, so this category of items to review is pretty small.

Looking carefully at these larger items will give you control over your bottom line, while only reviewing a few numbers.

Remember only you can make business great!

Ron Sturgeon, Mr. Mission Possible, has been a successful business owner for more than 35 years. As a small business consultant, he can deliver wisdom and advice gleaned from an enviable business career that started when he opened a VW repair business as a homeless 17-year-old and culminated in the sale of several businesses he built to Fortune 500 companies.

Ron has helped bankers, lawyers, insurance agents, restaurant owners, and body shop owners, as well as countless salvage yard owners to become more successful business people. He is an expert in helping small business owners set the right business strategies, implement pay-for- performance, and find new customers on the web.

As a consultant, Ron shares his expertise in strategic planning, capitalization, compensation, growing market share, and more in his signature plainspoken style, providing field-proven, and high-profit best practices well ahead of the business news curve. Ron is the author of nine books, including How to Salvage More Millions from Your Small Business.

To inquire about consulting or keynote speaking, contact Ron at 817-834-3625, ext. 232, rons@MrMissionPossible.com5940 Eden, Haltom City, TX 76117.