Monthly Archives: April 2008

“They Test Us Every Month…”

Last Saturday night, Margaret took me out to her favorite San Francisco restaurant for a belated birthday dinner. Since her own restaurant was famous for both great food and wonderful service, I am always intrigued by a restaurant that impresses her.

When ordering wine, the waitress was very knowledgeable about some esoteric Italian regional wines. And all three wines we ordered were everything she promised. As we expected, everything about the food and the service was exceptional.

At the end of the meal, I asked the waitress how she knew so much about the wines. What she answered is as close to a secret of success as one will ever get in any restaurant. She enthusiastically answered, “I drink the wines, they are always teaching us about the wines and they test us every month.” She said this with a confident pride and enthusiasm.

In a restaurant, your servers are your sales force. They need to be trained. Not just once, but regularly. They need try all of your offerings so that they know and believe enthusiastically in your product. I guess you small business owners both restaurant and others are saying to yourself, “I cannot afford to regualrly train and test my employees.” I say that you cannot afford not to.

Making Sense of the Numbers

Like most of my clients, I am not an accountant and have had to learn a simple method of looking at all those numbers. As I mentioned last post, many small business owners do not use their financial statements because they do not know how. In this post, I will suggest a simple method of looking at financial statements for non-accountants.

Step one. Get a monthly profit and loss statement, also called an income statement, and don’t panic.

Step two. Look at the left hand column of accounts and pick the three or four that you have any control over. They will be unique to your business, but there are usually only three or four. These are typically Total Income, Cost of Goods Sold, Payroll Expense, and Profit. For now, ignore the rest.

Step three. Compare each of these four numbers to what you expect them to be. For example, with the income in a seasonal business, compare the number to last year’s sales for the same month. If the sales are up and that is what you expected, great. If they are off, why and what can you do about it. For the rest of the numbers, it sometimes helps to look at the number as a percentage of the total sales. So for example, if your Cost of Goods Sold usually runs 32% of total sales, and this month it was 40%, there is something wrong. Find out what. Do the same for the other two numbers.

You are done. Well, not really. Now the real work begins. If the labor costs are up significantly, what can you do about it? If sales are flat, do you reconsider that next order?

The key to using the financial statement as a management tool is focusing on the numbers that you can do something about. For most businesses, most months, that means that you can ignore most of the numbers on the financial statement. That does not mean that you do not care about the cost of insurance or the cost of your rent, but as a practical matter, you can’t do anything about it. But you can and should stay on top of those three or four things that you can do something about.

Driving Blindfolded

Running your business without financial feedback is like driving on the freeway wearing a blindfold. This comparison may be a little extreme, but one of the most common problems I encounter in small businesses is not using financial tools. By this I mean that the business owner either does not have current accurate financial statements or, if they do, they are not using the information to run their business.

In fact, most of clients who come to me with a business that is losing money are also not keeping or using their financial feedback. Considering most small businesses are not started or run by financial managers, but by roofers, physical therapists, chefs and artists, this problem is understandable. That does not make it OK. I can not tell you how many times I ask a new client for their profit and loss statement and get a rather sheepish look. It is the same look I give my dental hygienist when she brings up flossing.

So here is the upside of learning to use financial statements: Many of the clients I see who learn to read and use current accurate financial statements become profitable very quickly. Why? It is just like the last time you took your eyes of the road and wound up driving on the shoulder. Then looking back to the road, you correct without even thinking about it. If you are a builder or a restaurant owner, I can understand why you pay more attention to blueprints or menus, but if you want to have enough to pay yourself at the end of the month, learn to use your financial statements.

I’ll give you my easy method in next week’s blog.