Fifteen Minutes a Month to Know Exactly Where Your Business Stands
Your monthly Profit and Loss lands in your inbox. It's three pages long, full of account names you don't remember setting up. You glance at the bottom line, feel either relieved or uneasy, and close it. Nothing about how you run the business changes.
If that sounds familiar, it isn't your fault. Most owners were never taught how to read financial reports, and most reports aren't built for owners anyway. This is the second post in a six-week series about turning your books from something you have to keep into something that actually helps you run your business. We'll start simple: the three numbers worth looking at first.
Number one: Gross profit
Gross profit is your sales minus the direct costs of producing them: materials, subcontractors, and the labor that goes directly into the work. When you divide gross profit by sales, you get your gross margin as a percentage.
This number tells you whether your pricing and your job costs are working. Watch it month over month. If your margin is slipping, one of two things is usually happening: your prices aren't keeping up with your costs, or jobs are running over.
One caution: gross profit is only meaningful if your costs are categorized correctly. If materials are mixed in with office supplies, the number won't tell you much. That's one more reason clean books matter.
Number two: Net profit
Net profit is what's left after you also subtract overhead: rent, insurance, software, vehicles, office staff, and everything else it takes to keep the doors open.
For most small businesses, comparing this month to last month can be misleading, especially if your work is seasonal. A more useful comparison is this month against the same month last year. Are you ahead or behind, and why?
Number three: Cash on hand versus what's coming due
This one comes from your Balance Sheet, not your Profit and Loss, and it's the number that keeps you out of trouble. Here's a simple way to look at it:
Start with cash. What's in your business bank accounts today.
Add what's coming in soon. Customer invoices you realistically expect to collect in the next 30 days.
Subtract what's going out soon. Bills, credit card balances, payroll, payroll taxes, and sales tax you've collected that's due in the next 30 days.
If the answer is comfortably positive, you have room to breathe. If it's thin or negative, you know now, while there's still time to act, instead of finding out when a check bounces.
How to read your reports in 15 minutes a month
Pick the same day every month. Put it on the calendar, a few days after your books are updated for the prior month.
Compare instead of just reading. QuickBooks can show columns side by side for this month, last month, and the same month last year. Patterns jump out quickly.
Ask "why" about anything that surprised you. A big jump in fuel costs, a slow month in sales, a margin drop. Each surprise is a question worth answering.
Write down one decision. Even a small one, like "follow up on the three oldest invoices" or "requote materials on the next job."
When the numbers don't make sense
If your reports look wrong, they often are. Unreconciled accounts, uncategorized transactions, and personal spending mixed into the business can all distort the picture. Our Tuesday series, Get Your Books Ready Before December Gets You, walks through how to fix exactly those problems.
What it means for your business and your life
When you know these three numbers, you stop running the business on gut feel and bank-balance checks. You catch a pricing problem in March instead of discovering it at tax time. You make decisions faster, and you second-guess them less.
It also takes away a lot of the low-grade worry. Fifteen minutes a month with the right numbers can replace hours of lying awake wondering whether you're okay.
What it takes to get started
Open last month's Profit and Loss and find your gross profit and net profit. Then open your Balance Sheet and do the quick cash check above. If you can't find these numbers, or they don't look right, that's exactly where we can help.
Who we are
Business Advisory Services LLC has helped small businesses across Wisconsin and surrounding states keep their books, payroll, and finances in order for more than 20 years. We don't just keep the books. We sit down with you, walk through what the numbers mean in plain language, and help you use them to make decisions.
Want someone to walk through your reports with you? Call us at 608-831-4900 ext. 801, or text us at 608-347-3010 or visit quickbooks-anywhere.com.
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