Providing accounting services to the service industry for many years I’ve seen an assortment of differing financial statement presentations. Some clearly lack an understanding of proper transaction recording and statement presentation while on the other side of the spectrum I’ve seen Profit and Loss statements that are 10 pages or more. Many only present cash deposits as gross sales and lump all other expenses in just a few lines which gives an owner or manager no management visibility into his or her business. The longer versions written like a chapter out of “War and Peace” provide so much disjointed information that it’s difficult to see the forest for the trees. What they all have in common is that they fail to present financial and operational information in a concise manner to be an effective management tool.
As a manager of a land care business, when I look at a set of financials, my sole objective is to determine within one minute if the company is profitable and if the operational revenues and expenses are in line with standards that we’ve created for the land care industry. At year end, I’m looking to see how I can reduce my tax burden to its legal minimum.
Standard Chart of Accounts. Surprisingly many new clients we work with use a generic chart of accounts, one that an ice cream store or any other generic business can use. These charts are usually created such that an accountant can prepare the year-end tax return. The fact is that the IRS is looking for bottom line profits to tax.
The expense categories they want broken out are on the tax return.
While useful for calculating taxes, they provide little in the way of management reporting.
While preparing taxes are one use for a Profit and Loss Statement and an important one at that, the management information that comes out of properly prepared financials is invaluable in growing and improving a land care business. Look at a well prepared financial as a business building tool that should be looked at often. As such, the goal should be to present the firm’s financial information in a manner that allows the owner or manager to determine his or her true costs by department within one minute of picking up the statement.
So how is a “One Minute Management” approach taken to develop a useful profit/loss statement?
Group Revenues by Division and Service Agreement Type. The most important revenue in the land care business or any service business for that matter is recurring revenue. In land care, because most of us run divisions defined by skill set or marketing groups such as commercial, residential, fertilization, lawn maintenance and other services, and we keep those as major headings. Within those headings we are interested in recurring -route work, recurring – renewals and non-recurring jobs. Most dispatch programs used in the industry allow you to do this. The trick is bringing the information, as well as the related customer payments and accounts receivable, into a general ledger program, such as QuickBooks, in such a fashion that both programs reconcile to each other.
By segregating revenues in this manner, the successful owner or manager is able to determine the type of work he is doing and how much he can expect to repeat in the future when budgeting.
Group Expenses by Direct Costs, Marketing Costs, Sales Cost and General and Administrative Costs
Direct Costs are costs associated with putting a technician on the road or your true operational costs. These costs include technician wages, benefits, payroll taxes and uniforms. In addition to the costs associated with the technician himself, the cost of his truck, auto insurance, fuel, materials and others are also all direct costs.
Marketing costs and sales costs are often confused. Marketing is all activity to produce a customer lead. It includes advertising in print, online, direct mail, etc. Sales costs are all costs associated with converting those leads into sales. They include salesperson wages, payroll taxes, benefits, sales vehicles and all associated costs.
General and administrative costs are those costs that don’t fit into the categories above. Usually these costs are known as fixed costs as they are fixed over several volumes of business. They usually include cost of running the office, as well those other management costs.
The Importance of Gross Margins. Direct costs essentially indicate the cost of your operation. The gross margin, or gross profit as some financial professionals call it, is the revenues minus the direct costs. By looking at the gross margin we can determine if we are efficient operationally. It also tells us if we have done enough revenue volume to cover our non operational costs (i.e. marketing, sales and fixed) and allow us to show a reasonable profit.
The anatomy of the One Minute Profit /Loss Statement. While the above presentation describes a profit/loss that gives a viewer a one minute and accurate synopsis of his operation, what we all too often see are statements that have various staff compensation expenses (salaries, payroll taxes, fringe benefits, and retirement plan contributions) and other expenses clubbed together, making it extremely difficult to determine for the manager if total employee headcount and salaries are appropriate for the volume of business. The key to the simplicity that is required to create the “One Minute Profit/Loss Statement” is to organize the chart of accounts:
Minus: Direct Costs
Equals: Gross Margin
Minus: Marketing Cost
Minus: Sales Costs
Minus: General and Administrative
Equals: Net Profit before Taxes
Compare Results with Industry Benchmarks. If the steps set forth above have been taken, the owner or manager can easily determine his true profitability. The owner manager can further benefit by measuring these results against some industry benchmarking standards. Many well-prepared Profit/Loss statements compare the current year results against the prior year both for the current month and the year to date.
The most successful land care professionals also create an operating budget by month, and measure their actual results against the budget to measure their level of success.
Compute variances with standard. Once the “One Minute Profit/Loss Statement” has been set up with actual against the benchmark column (either prior year or budgeted amounts), it is important to see how the actual current year's results match up. To this end, I recommend a column showing the variance between the current year results and the benchmark selected so that the land care professional can easily determine if he or she is ahead or behind the "target." The variances provide a starting point for the land care professional to ask hard questions about why the company may or may not be measuring up to last year's performance, or this year's budget. These questions provide the basis for management changes required in order to improve performance.
Producing a “One Minute Profit/Loss Statement” that meets its objectives through the steps above doesn’t need to be difficult. General Ledger programs like QuickBooks are easily adapted to generate financial statements that meet these criteria. A competent CPA can help you set up QuickBooks and take information from your dispatch program and marry it with QuickBooks in order to produce the one minute manager reports.
Give your financials the "one-minute test." If you can't accurately determine your true firm profitability in a presentation that quickly gives you information you need to run your firm, it's time for change. Revising your firm’s financial statements as described above will more accurately reflect your firm’s true financial performance. But most important it will give you an effective tool to make management changes to improve profitability.
Daniel S. Gordon is a CPA in New Jersey and owns an accounting firm that caters to Landscape Professionals throughout the U.S.