In today’s episode we are going to take a deep dive into the profit and loss (P&L) statement covering topics such as 1) what is a P&L statement?; 2) Why is a P&L so important; 3) What to do when you receive your P&L?; and 4) What strategies Ken and I use in our own businesses to analyze our books and make decisions that drive value?
Listen to the episode and know how to utilize the P&L statement!
[00:01 – 05:27] Opening Segment
- Why a profit and loss (P&L) statement is important in a business
- David explains
- 2 ways to get a P&L
[05:28 – 15:28] Show Us The Money!
- Why we get excited when we receive our P&L
- We break down the net income
- Analyze your P&L with these key steps from David
- How to see trends?
[15:29 – 25:07] Understanding Gross Margin
- Want some Amazon refunds? Check out Getida
- Promo code: FTM400
- An MS Excel hack that you should know
- We talk about gross margins
[25:08 – 30:13] Improving Your P&L
- David talks about the “real gold” of an income statement
- Improve your P&L next month with these tips from David!
- Are you not an accounting or finance major?
- No problems! Listen to David’s advice
[30:14 – 33:49] Closing Segment
- Make more money by utilizing the P&L!
- We summarized this episode into several key steps
- Connect with us. Links below
- Final words
“The numbers speak to you in trends. Look at them and troubleshoot them up.” – Ken Wilson
“Don’t let net income be an afterthought. Have it be something that you plan on.” – David Schomer
- Firing the Man Ep. 78 on ACoS: Intersection of PPC & Profitability (PART 1)
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Real quick before we get into the show, I wanted to share a new service called Getida that Ken and I have been using that has made us over $10,000 in Amazon reimbursements. The service requires no monthly subscription, and getida collects a small percentage of the money they recover for you. It takes less than five minutes to set up and works on all Amazon marketplaces. Go to getida.com GETIDA, and enter promo code FTM 400. That’s FTM for firing the man 400 to get your first $400 in reimbursements commission free, how much money does Amazon owe you? So the goal of the business is to generate net income and that is going to be your revenue minus your expenses. And what a p&l does is it tracks this it is essentially your company’s report card and how it’s performing. So this is the real gold of an income statement. And this is why when I set the baby down on the ground gently and look at my income statement, the first thing I’m looking at is net income. But my goal is to move levers in a way that makes my net margin increase. Those levers could be PPC, those could be pricing those could be negotiating with suppliers. There’s a lot of different levers but you’re always aiming to increase your net margin.
Welcome, everyone to the firing the man podcast, a show for anyone who wants to be their own boss. If you sit in a cubicle every day, and to know you were capable of more then join us this show we’ll help you build a business and grow your passive income streams in just a few short hours per day. And now your host serial entrepreneurs David Schomer and Ken Wilson.
Welcome everyone to the firing the man podcast on today’s episode, we’re going to take a deep dive into the profit and loss statement covering topics such as what is a profit and loss statement? Why is the p&l so important? What do you do when you receive the p&l? And what strategies Ken and I use in our own businesses to analyze our books and make decisions that drive value? Ken, what’s going on, man?
David, what’s up man excited to be in the podcast studio covering one of your favorite topics. This is your wheelhouse, you’re an expert at this. To all the listeners out there, if you don’t have a finance background or business background, you’re going to get a ton of value out of this podcast. You know, when I first started my business on the side, you know, I’m a network engineer by trade. I had no idea what a p&l was. I thought it maybe was like the sister to pb&j. You know, maybe it’s a snack. I don’t know, I had to learn to figure all that stuff out. So today, David’s gonna serve everything up to you on a silver platter. So let’s get right into it. David, what’s a profit and loss statement?
Yeah, so another name for this is the income statement. The street name is p&l. That’s what a lot of people will call it and what a p&l is, it’s a financial statement that summarizes the revenue, your costs and expenses during a specified period of time. So we get these on a monthly basis, sometimes you’ll see quarterly p&l or sometimes an annual p&l. So that is what we’re talking about today.
Excellent. So why is a p&l so important, David?
So the goal of a business is to generate net income, and that is going to be your revenue minus your expenses. And what a p&l does is it tracks this, it is essentially your company’s report card and how it’s performing. And so what you can do to use this is highlight trends in revenue, you can look at expenses, where they’re increasing, where they’re decreasing, and all aimed at the goal of maximizing your bottom line net income. And so it is so important to running a business is just having a good understanding of this.
Yeah, absolutely great. I like that analogy that it’s your company’s report card, because it really is like you get measured off of the p&l and that income and how that business is operating and functioning. And same thing with school, a lot of people will know what a report card is it’s how you’re graded from your studies. So moving along, where do you get a p&l from? How do you get it?
You know, this is something that this may surprise some people, but I am a CPA, but I don’t keep my own books. So anyway, there’s really two ways to get this. One, you keep your own books, get a QuickBooks account, or zero, or there’s a number of other programs and you keep track of all of your revenue items and all of your expenses and you plug them in there. Now if you have a business that is generating some net income, I would highly recommend outsourcing this. And although I was a CPA, although I worked at a public accounting firm for eight years, I actually was not very good at keeping my own books. Accounting knowledge and bookkeeping are two different things. And it is really nice to outsource to somebody that does this every day. And then your only job is to analyze the financial statements. And so it also oftentimes when you aren’t generating if you don’t have professionally generated financial statements, and you don’t have a lot of confidence in your own bookkeeping skills, you may see a trend in second guess it. You know, you may see expenses increasing, but you’re wondering, hey, is that a mistake that I made or is that a real trend and so having confidence in your books is huge. And so I would recommend that everybody for a couple 100 bucks a month is is something that you can outsource, we’ll post a link in the show notes. But we had Anna from accounting, we will go on her podcast and she’s wonderful to work with for purposes of full disclosure, she is who Ken and I work with and just absolutely wonderful. And she specializes in specifically ecommerce companies. So she’s very familiar with the ins and outs of Amazon and how they hold on to your cash for several weeks, and just very familiar there. So that would be my advice is reach out to Anna or some other professional to get these done.
Yeah, that’s interesting. And I’d like to highlight that. So David, you’re a CPA and you hire out someone else to do your own books. And not that you can’t. But I also, I’d like to highlight that. So as a solopreneur. Or as you’re building a small business, even though you’re good at something, getting more off your plate, so you can do other things to grow your business, I think is crucial. And I think this highlights one of those aspects where you are an expert in that, and you could do it, but you hired out. So if you did it yourself, you might not see those trends, or you might not see that stuff that’s coming in from an independent source. And then you’re able to look at that and analyze it from a second point of view. So crucial.
Absolutely. You know, as a business owner, if you have five hours a month to dedicate to keeping your own books, or you could use that same five hours and analyze and make decisions based on your books that are professionally prepared, the juice would be worth the squeeze on hiring a bookkeeper and analyzing and making decisions, which we’re going to get into later in this episode.
Absolutely. So David, what do you do when you receive your p&l?
So I stop whatever I’m doing and take a look. And I’m a little bit of a fanatic about this, but I love getting my p&l, we get them on a monthly basis. If I’m driving and I get the notification on my phone, I will pull over just about anything I’m doing, I’ll interrupt and take a look at it. And the reason I get so excited about these is it’s a really nice checkpoint to see how you’re doing as a business owner, you know, we’re often moving several levers doing different things with PPC, and once a month, it’s a report card that shows up once a month. And I really like to see how I’m doing. So typically, I’ll pull it up on my phone, I will scroll right down to net income. That’s why I’m in businesses to generate net income, then I will usually think about it for a little bit and then put it away. And then I revisit it later in Excel. And I’m going to talk about that in a little bit. But for those of you that are getting books prepared on a quarterly basis, you’re missing out, you’re missing out eight exciting times a year that you could be getting monthly financial statements. So highly recommend the monthly. What about you Ken when you get the notification if you’re holding the baby, do you drop the baby?
I don’t drop the baby. But if I’m holding anything else, it’s getting dropped. So yeah, you’re right, getting that email from the bookkeeper and saying, Hey, your monthly financials are done. I usually take a break from whatever I’m doing. I’ll pull them up. And you’re right. Yeah. So I scroll right to the bottom and I look at the net income, Show me the money. That’s why I get up every day and work hard and do everything that we’re doing is for money, right? work for yourself. And so that is your report card that is telling you how you’re doing. And some months, it’s really good. And some months, it might not be that good. But numbers don’t lie. And I look at it immediately. I want to know, I want to know what does that look like? What is the post of the business? And how is everything functioning? And you know, there’s a wealth of information. And as we’ll get into, so David, how are you analyzing your p&l and making decisions based off of the numbers?
Absolutely. So what I did to prep for this episode was every month I follow a very similar process. And I just documented exactly what we’re doing in our own businesses to analyze the portfolio companies. So this is a real life example. This is exactly what I do. The first thing is in order to get your books, generally, you’re going to need to download your bank statements and credit card statements and send those off to the bookkeeper. And the bookkeeper generally a couple days later will send you a vendor report, this is going to be an itemized list of all the expenses that you incurred that month, and all cash inflows. And so I like to comb through that. And you know, there are certain expenses. So for instance, say you write a check to somebody for travel, right? Say you’re traveling, I like to make sure that all of my expenses are in the right category. And sometimes, so for instance, if I have a business meeting at chick fil a, the bookkeeper knows, that’s meals and entertainment, they just put it there. But there’s a lot of expenses where you don’t have a lot of detail on the credit card statement. And so that’s your opportunity to weigh in and make sure they’re in the right category of expenses. And you know, as I’m going through this, I’m literally looking at every single expense incurred in that business for the month. And I’m asking myself, do I have an opportunity here to trim the fat on any expenses? So you know, Ken, both you and I, we are a sucker for a good subscription service. And you know, that’s something I’m looking at every month is thinking to myself, did I use this subscription service? Is it worth the $99 that I paid, if not guess what I’m going to strike it and if I ever need it, I can go back to it. But I like to identify items that are non necessary and are just sucking away from net income. So that’s the first thing that I do. I will send that vendor report back with my comments to the bookkeeper. And then I wait a couple days and this is where the anticipation starts to build and I know sometime in the next like three to five days I’m going to get that notification on my phone. I’m going to set the baby down gently And then I’m looking at my p&l. So on that day when it shows up, so I use QuickBooks. It’s an Intuit product, QuickBooks runs I don’t know what percentage of businesses in the world, but it’s a lot. It’s a wonderful program. And that’s why I use QuickBooks, what I like to do is download my monthly p&l into Excel format. And to do that, you would go to reports profit and loss by month. And when I’m pulling this, I usually like to pull 12 months of data. And the reason for that is it really gives you good opportunity to look at trends from month to month. And so I download it and I get my as reported p&l in a spreadsheet. Now the second thing that I do is I will take that profit loss statement, and I will copy it just to the right. So that’s my as reported. And I make an adjusted p&l. And there are certain things that I’m doing on this adjusted p&l to measure performance. And one thing that I like to do is back out one time items. So for instance, in the most recent month, we had hired a consultant to help us with international expansion, it was a one time fee. And so what I did was I backed that out, right, I’m likely not going to incur that in future months. And so I like to back that out things like product photography, owners compensation, right, you know, you can pay yourself more one month and less one month, but I like to see how is like the core business operating. And so that’s why I like to make this as adjusted p&l. So that’s the start of the as adjusted p&l. The second thing I like to do is smooth out large expenses. And the one that comes to mind here is freight in we have a portfolio company that will incur freight in somewhere between 10 and $15,000, every three months, like clockwork, and so you’ll be looking at month to month performance. And in the month that you incur $15,000 of freight, your net income is likely much lower than those other months. Now, it’s a one time expense. But you really realize the benefit of that freight in over the next couple of months. And so what I like to do, so for instance, I just did this for the four months ended April 30 was I took total freight in, and I divided it by four, which was just the number of months so far in the year. And that smooths out that freight in. And if I look at total net income, it doesn’t change. But when I’m tracking month to month expenses, it really smooths things out. And I like to do that. So Ken, anything up until now that jumps out at you.
Yeah, so when you’re saying like smoothing everything out. So if someone’s listening to this, and they’re looking at their p&l, and when I first started seeing this, I always called it lumpy. I’m like I go through there. So if I’m looking at the p&l, say up through October for the year, and I see certain months that have like huge amounts and other months have zero mounts on the same line item, what you’re saying is take that and average them out by 10 and spread them out. So then like in one month, if it hits the net income is like way low, and it’s because of one massive charge. So I think that is crucial if you’re out there, and you see that on your p&l doing what David says it could be helpful to really highlight how the health of the business versus one impacted item.
Absolutely yeah. I mean, high net, you know, to boil it down as simply as I can. high net income is good, and low or negative net income is bad. And if you have a company that produces net income of $5,000, and then $5,000 the next month, and then $5,000 the next month, then negative $10,000 in the following month, you know, you go Good, good, good, bad, I did something bad. And that’s not the case, right? That freight in that’s a necessary charge that your company incurs. And you will realize the benefit over however long it takes you to sell those products. But yeah, I like to eliminate the lumpiness to kind of, that allows me to drill down into what things do I have control over?
Yeah, for sure. great analogy.
For sure. So what I like to do after I have my as adjusted p&l is off to the right, I will make a new table. And what I do is I take every line item and i divide it by total revenue for that month. And that gives you a percentage, right? You multiply that number by 100. And it gives you a percentage. So the reason I like to do that is this is a really good way to pick up on trends. So for instance, say you have $1,000 of revenue, your advertising expense was $100. This is going to show up as 10%. And so what I like to think of is for every dollar that this business generates in revenue, 10 cents goes to advertising. And so this percentage of revenue is a great way to look at your p&l. And there are a couple line items that I am always looking at for trends. One is refunds. I’ve got a portfolio company that averages like somewhere between one and one and a half percent in refunds. If that spikes to two and a half percent, I need to dig in and understand why was there a spike there. And the reason that I like to do it as a percentage of revenue is if you just look at the number of returns you have. Say you have a really giftable item and you have 5x the sales in December that you have in any other month, well, you’re probably gonna have 5x the returns and so it looks for those trends as a percentage of revenue. And so I really like to look into that, you know, for instance, if it’s something that sizing maybe I need to do something different with my sizing chart, but anyway, I just really sensitive to that particular line item. Another one I like to look at is Amazon fees. If I see a spike here, it reminds me that I need to go back and make sure all my pick and pack fees are being charged the correct amount, that’s something that’s super common is you’ll have a product that should be in the small size tier, but it’s being charged the large size tier price, and that really has a big impact on your profitability. And so I like to see if Amazon fees are trending up or trending down. Sorry to interrupt the episode, you may have heard Ken and I talking recently about a new tool that we’re using for Amazon refunds. Now I have used other refund tools like this. However, I can tell you in the first seven days, they scrubbed the back end of my Amazon account going back 18 months and found $5,000 of refunds. And the nice thing about this is it’s my money, Amazon made a mistake and they are just auditing my account. The other thing I really like about this tool is there is no monthly fee, they only charge a commission if they are successful in getting you your money, go to getida.com GETIDA and enter promo code FTM for firing the man FTM 400. This is an awesome tool. I can’t say enough good things about it. Now back to the episode.
Yeah, so to piggyback off of that. So David, whenever you started sharing with me this process that you’re using, it was a really easy way to highlight trends that I would have never seen before. Like you mentioned Amazon fees, returns, PPC cost. So this is kind of like what I would say a next level way to look at trends based off of this formula here. And I have found several things and portfolio companies that jumps out to me like oh, Amazon fees are trending up, you know, like you mentioned, go and check the pick and pack fee or whatever other fees might be in there that we use getida to help correct all of that. But prior to that, that was definitely an issue and the returns, like you said, Hey, you know returns might be if you look at just the numbers over a 12 month period. And they’re you know, like because if you have a seasonal business, the numbers are all different, and nothing would jump out at you. But if you look at the trend, and then you see a return trending up over a three or four month period, you’re like, Oh, we have a problem. So let’s go drill into that and find out what that is. So this is a really good way of being proactive in a reactive way.
Absolutely, absolutely. Well said. So I like to build that. That is the infrastructure that I will build every month in order to analyze, which I’m going to get into next. And so once I you know, what I like to say is I spent probably two to three hours on this process, this analyzing process that I’m about to go into. And we use this to make decisions on what we’re going to do differently next month. So to take it from the top, the first thing that I like to do is look at revenue. If you have a company that’s been around for more than one year, I like to graph out revenue and see how it’s trending against last year. And was it trending up? Is it trending down? I like to look at seasonality, right, you know, we have one particular portfolio company that’s highly seasonal. And if I know I’m going to be ordering inventory, I need to be thinking in advance, what is the hot time of season for this product and adjust my inventory purchases accordingly. So I really like to look at revenue first and just see how was this month were sales up or sales down, because that really drives everything right? If you doubled your revenue, likely your returns are going to double, then you can go through and look at your fixed and variable expenses and dig in deep on your company. So anyway, and here’s just a pro tip for people that use Excel a lot. There’s a feature called sparklines. And what this does is it can make a cell A very small line graph in a cell. And it’s a really nice way to make a lot of line graphs quickly. And so if you haven’t used sparklines, check them out, they’re super easy to use. And it’s another next level Excel hack that I’m a big fan of.
So next I like to dig into gross margin. And so what this is going to be is the net sales minus my cost of goods sold. So in other words, it is the sales revenue that the company retains after incurring the direct costs associated with producing the goods it sells or the services that it provides. Higher gross margin means that the company’s going to retain more capital, and you have more money to spend on operating expenses, which I’m going to get into next. And so this is something that I really like to take a hard look at. Because for instance, say I did a product launch and I see my gross margin trending down, well, maybe that product is priced too low, and it is kind of diluting my overall gross margin mix. Maybe it’s trending up. And that’s great. Maybe I just renegotiated with a supplier and I want to see how has this impacted my business? Well, I look at that gross margin amount. So you’ve got your revenue minus your cost of goods sold equals gross margin and gross margin can be stated either as a percentage or as a dollar figure. In QuickBooks, it’s going to be expressed as dollar figure. And so what I like to do is insert a line and do the dollar figure divided by revenue, which is going to give you a percentage this would also be addressed in the percentage of revenue table that I was talking about earlier. So After I do that, I like to look at expense items, what’s trending up? what’s trending down? Did I trim the fat last month? And how did that impact my expenses this month. And so these are all aided by sparklines. I like to use a lot of graphs. But you know, spend some time in here and understand each line item. And if an expense is trending up, and you don’t have a good understanding of why dig into it, and if you have an expense line item that’s trending down, that’s a good thing, but also look into it understand why it’s trending down. And so I’m a very visual person Ken I know you are as well. And I think adding graphs really brings a lot of flavor to an Excel spreadsheet.
Yeah, I totally agree. You know, so like, you know, David, coming from the CPA world the finance world, you kind of live in Excel and all that stuff. But for me, you know, like, I would much prefer graphs and seeing something visual and seeing the trending up. Yeah, if my expenses of PPC was trending up, I’m like okay, well, why is this? Is revenue the same? Or is it not? Or, you know, kind of this is just a really good way the trending Is just a really good way it’s a form of troubleshooting your business in a sense of taking the numbers, you know, the numbers speak to you in trends, right, look at them, and then troubleshoot them out? But yeah, very visual graphs. I’m a huge fan of graphs. So what’s next, David,
you know, one thing that we’ve started doing is integrating this financial analysis into our PPC conversations and Ken that’s something that you’re the captain of the PPC ship in our portfolio companies. And this has led to a lot of really good conversations. So one thing at the very bottom of the income statement that I like to add in is account wide ACOS. So that would be average cost of sale. To get this, it’s not going to come out of QuickBooks, you need to go into Amazon, if you have a lot of sales coming from Amazon and just pull the account wide ACOS for that particular month. The second thing that I like to do is look at my tacos, or total advertising cost of sale. And to calculate this, you just take your PPC spend and divide it by total revenue. And the reason that I really like this is every brand is going to be a little bit different in terms of where their sweet spot is, I think a lot of it depends on how competitive of a category you’re in, the sales velocity of your products, how long your listings have been around, but every brand has a sweet spot for ACOS. And it takes some time to figure that out. And so I like to graph out ACOS relative to my net income, right, as we discussed earlier, high net income, good low net income, bad. And so, you know, if I see high net income, I like to see what my ACOS was that month. And one reason that we strip out these one time items is so we can kind of right size that net income and see how is the core operations of the company functioning. And so this allows you to do that. Same thing for tacos, I like to look at my net margin, which I’m going to get into next. But I like to look at net income relative to tacos at what tacos point is my net income the highest. And typically internally, this is something that I’m communicating with you on a monthly basis. If you have a PPC manager, this is something that you can be communicating with them, I would say that people are often very private about their p&ls in my opinion, a little silly. And so I share my p&l with my PPC manager. And I’ve got no problem with doing that. He’s on my team, he wants to generate more net income. Now where that can come and bite you in the ass is if he sees you’re making a whole bunch of money, he might increase his fees, which has happened to me. But I do think like having some transparency with your team on your p&l is a good thing. And it helps you align interests. So that’s just a way that we’re analyzing specifically PPC management. And it’s kind of the crossroads of PPC management and financial analysis.
Yeah, one thing I would like to add there is you mentioned a little bit, but I kind of want to go into a little bit deeper, and the numbers for every business are going to be different. And not only for ACOS but pretty much any brand. So if you hear numbers out there, like oh, I need to be making this or I need to make this or you know, I would say maybe be a little bit cautious to compare your business to another business, especially if it’s in a different category or a different marketplace, or whatever. So each business is like its own little entity, right? It’s its own business. So for example, if you’re selling you know how David mentioned, the portfolio companies, each one has a different Acos and a different tacos, and they’re not likely ever going to be the same. And if you try to force them, then you’re probably you know, moving the levers that you might not want to move. You know, for example, if you sell supplements on Amazon, or phone cases on Amazon, your Acos is likely going to be a lot higher than if you sell rocking chairs or tables, right? There’s different competition levels. And that’s going to trend down into your Acos into your tacos. So as you’re going through your own p&l, try not to compare them to another company and say, Oh, I’m doing good or bad, but just you’ll have to kind of drill into it through this analyzing and then start just cleaning everything up. This takes time. It takes months to kind of go through and clean this up. But at the end of the day, if you’re kind of following this process, then you will just organically clean up your business as you’re going through analyzing your p&l and then pulling levers. Just wanted to add that in there. Can you define net margin David?
Yeah, you bet. So this is the real gold of an income statement. And this is why when I set the baby down on the ground gently and look at my income statement, the first thing I’m looking at is net income. And so what net margin would be is just net income divided by revenue. Very simply, this would be out of every dollar of revenue that is collected how much translates into profit, right? After everyone gets paid, how much are you putting in your own pocket. And this is something that I watch very closely. And obviously higher is better. It’s going to be different for every company. But my goal is to move levers in a way that makes my net margin increase. Those levers could be PPC, those could be pricing, those could be negotiating with suppliers. There’s a lot of different levers, but you’re always aiming to increase your net margin.
So David, as we move through here, what are some things that you can do next month that will improve your p&l?
Yeah, absolutely. So as I was talking about, like moving levers, this is exactly what I’m talking about. And so number one would be adjust pricing. Typically, when I launch a product, whatever price point, that is, it’s not the price point A year later, I like to move my prices up, I like to move them down. Typically, when you move them up, you’re going to take a hit on conversion rate, but you also may be a little bit more profitable here. And so anytime I’m adjusting pricing, this is just kind of a personal preference. I like to do that on the first of the month, and then I won’t move those prices till the end of the month. And that way I can see on my p&l, did these pricing adjustments helped me achieve higher net margin or hurt me? And so that’s one lever that we’re constantly moving is pricing. You know, the second one is expenses, where can I trim the fat? What are some unnecessary expenses in my business. And I think that goes to being diligent about looking through every single expense in the company, I really don’t enjoy this process. To be totally honest with you, there’s nothing more boring than going through my credit card statements, it just is a boring thing to do. But like I force myself to sit in the chair every month and do it and it’s so critical. It’s so critical to do. And so don’t let net income be an afterthought. Have it be something that you plan on. So you know, the next thing would be adjust PPC spend, you can help dial in your sweet spot on acos and tacos by looking at your p&l and making decisions based off your p&l. And if you have a high net income at a 10% tacos, and low net income at a 15% tacos, guess what you need to be communicating with your PPC manager, hey, we’ve identified a sweet spot in this company. And this is what we should be targeting. And then I would say the last thing is document document document, For every portfolio company that we have we have a p&l journal, and what we’re doing is we’re documenting when we’re out of stock on things we’re documenting when we increase prices, we’re documenting everything that we do. And that’s really helpful when you’re looking back a couple months, for instance, like, hey, April was an awesome month. Why was it awesome? Well, you can go back to the p&l journal and see that you adjusted pricing up, you cut PPC spend, you moved certain levers and it resulted in a better outcome. And so I would also say, and we were talking about this, just the other day Ken fast forward a year later, when you’re say like getting ready for your q4 order, it would be really helpful to know what was you know, when you’re looking at how many units were sold, it would be really helpful to know hey, did I have any stock outs? or Why did things really pop in this particular month, and you know, if you have some real time information, put it in the journal, it doesn’t take that long. And it’s something that you will have the benefit of hindsight. And the more detail you have here, the better your hindsight is gonna be.
Yeah absolutely. So documenting, and documenting, and then kind of looking back at the historical records, it’ll help you find errors you made previously, and then you know, make corrections for them in the future. We’re going to condense all this up into just a few simple steps to follow. But before that, David, is there anything else we want to cover?
You know, I would say the last thing would be if you don’t come from an accounting or finance background, which I would say most people don’t, and you’re having troubles understanding your p&l, I would highly recommend reaching out to somebody and having them sit down for an hour and walk you through it. And my bet would be whatever you pay that individual that investment will be returned to you tenfold. I mean, I think simply ignoring your p&l is a critical mistake that you just can’t make. And so I would say if this is something that is a little bit confusing to you, or a little bit boring, or something that you don’t want to really invest time into, then hire a professional to explain it to you. You know, one thing I reached out to Anna, our bookkeeper all the time because she’s a wizard at this. And you know, I say hey, you know, I’ve seen this trend, what do you think and you know, the bookkeeper has a lot of great insight. And typically they work with a lot of similar clients as you and so they’re the ones issuing the report card, right? They’re the teacher and so their students or their clients, right, they know how good your company’s doing relative to their other ones. And so that would be my pro tip is just if you don’t understand it, hire a professional. If you do understand it, dig deeper. And if you’re not spending least two hours a month analyzing your p&l. I believe you’re leaving money on the table.
Yeah, excellent advice. I totally agree with you and coming from a non finance background myself moving into business, you know, four years ago, I’ve had to learn along the way and everything we covered here I wish I knew early on and instituted early on in my career. So Excellent. So David, can we go back through all of this information and then kind of condense it into four or five steps for the audience?
Absolutely. Step one. If you don’t have a bookkeeper, get a bookkeeper. If you want to do your own books, that’s fine. But I would suggest getting a professional bookkeeper. Step two, you need to gather all the information and provide it to that bookkeeper, that’s going to be bank statements, that’s going to be credit card statements, and then let them work their magic. Step three is when you get your vendor report or whatever your bookkeeper calls it, go through every single line item. If you see an expense that you don’t remember having, or you don’t know who exactly that payment was to investigate it, dig deep, understand all the expenses that are flowing through your business. Step three, get your financials, set the baby down gently on the ground, and start analyzing and this is best done in Excel, what you’re going to do is you’re going to look at your as reported income statement, you’re going to make an as adjusted income statement where you back out one time items, owners compensation, then you’re going to smooth out any lumpy expenses as we discussed, like freight in, and then we’re going to take that adjusted income statement and create a percentage of revenue table which is going to help you identify trends. And then I would say the final step is sit in a chair and look at this for two hours. And even if you are just staring at a blank screen, don’t get up until that two hours is done. You will learn something, there’s wonderful information here. And like I said, if you’re not spending this two hours on your p&l every month, you’re leaving money on the table, I can almost guarantee it.
Yeah, absolutely. And lastly, after you sit in that chair for two hours and analyze those numbers, go and take action, pull some levers and improve it. So the next month when you go through this rotation again, you’ll see an improvement.
Absolutely and document those levers and you’re going to be off to the races. And this is going to be something that is going to put more money in your pocket. It’s going to give you peace of mind it’s going to help you understand your business better. It’s an all around good thing. So don’t let Profit and Loss be a dirty word in your vocabulary. And we’ll see you next week. Thank you everyone for tuning in to today’s firing the man podcast. If you liked this episode, head on over to firingtheman.com and check out our resource library for exclusive firing the man discounts on popular e commerce subscription services. That is firingtheman.com\resource. You can also find a comprehensive library of over 50 books that Ken and I have read in the last few years that have made a meaningful impact on our business, for that head on over to www.firingtheman.com/library. Lastly, check us out on social media at firing the man, and on YouTube at firing the man for exclusive content. This is David Schomer
and Ken Wilson. We’re out
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