A case study: Let's make a profit! S1E8

If you are looking at your monthly Profit and Loss report and not showing a profit or want to increase your profit, listen to this episode! Every business is different but get some ideas on how do increase your profit!

Transcript

                                      Episode 8:  A Case Study 

Welcome to another episode of the (Not Boring) Boring Small Business and Accounting Podcast.  

I’m Paul Rosenblum. 

Today, I want to switch roads a little to talk about one of the ways bookkeeping can help the business owner understand more about their businesses and to make better decisions moving forward. This episode has been conceived because some of my brand-new clients have only use bank statements to analyze their business and forward those bank statements to their tax preparer to file taxes, and the client wanted and knew they need more detail to make good business decision moving forward.

Let’s take the case study of a restaurant for today’s episode.  This restaurant has over $200,000 of sales (or revenue) per month.  Most people would automatically think that it’s a successful business. However, in this scenario, the company is only breaking even or losing money every month.  

The Bookkeeper is the person who is most acquainted with the numbers that are occurring.  In this case of a restaurant, the bookkeeper is entering the sales, the cost of goods, and the expenses which make up the Profit and Loss.  Many restaurants have loans from people or banks or other lenders whose monthly outgoing payments go on the balance sheet and not the profit and loss which we have spoken about in an earlier episode. 

So, in any business that has outstanding loans that they are paying every month that aren’t reflected in the Profit and Loss of the business, the money in the bank won’t necessarily reflect the Net Profit of the company. The Profit and Loss could show a profit of $40,000.00, but since $40K was paid out in monthly loan payments, for one example, the cash in the bank might be at $0.00.  But that’s for another episode.  

If the revenue of this business is $200K or more, but the profit is either non existent or they are in the negative (a loss), then the bookkeeper (even before the accountant sees it), could determine where the money is going by looking at the cost of goods and the expenses category by category, which is why the chart of accounts is so important to get right.  

In our case study, let’s imagine that the revenue was $210,000 for one month, and the cost of goods was around $100K.  In a restaurant, the cost of goods would include all ingredients, all restaurant supplies that they need to cook food, delivery fees for the food and any soda, water or alcoholic drinks that they purchase and re-sell to customers.  If almost half of your revenue was spent on the cost of goods (that is – money that had to be spent to make the revenue), is the GROSS revenue enough?  Is the revenue enough to cover regular expenses like rent, payroll, extermination services, office supplies, bookkeeping and accounting expenses, utilities, and insurance and merchant fees for accepting credit cards? In our case study, revenue (210K) minus cost of goods (100K) leave around $110,000 for all of these regular expenses, including any repairs that come up without any notice.  

If the expenses are $115,000 that month, then the company is taking a $5,000 loss for the month.  It sounds very weird to most people, that a company that takes in $210K in revenue, can take a $5,000.00 loss in the same month, not including any loans or monthly equipment payments or longer-term debts that are getting paid off that are on the balance sheet, and not the profit and loss.  But it happens.  More than most think. 

What can the business owner(s) do about that?  What kind of suggestions can the bookkeeper or the accountant make to the business owner? OR EVEN – what can the business owner or partners in a business look for in their own books to improve the situation? 

In our case study, the main categories on the chart of accounts to look at (other than revenue) would be:

1. The Cost of Goods section

2. Payroll (A regular expense, but arguably a Cost of Goods (Cost of Labor) 

3. Any other cost that can be partly controlled by the company including monthly prices of software or any dues and subscriptions that the business might not 100% need. One example would be two subscriptions for software for two different computers. Can the work be done on one computer? I recently saw when putting together the books for a law firm that two partners of the law firm had a restaurant delivery service monthly subscription fee showing up twice a month.  I called their office, and they told me that two partners had the monthly subscription since they saved delivery fees when they bought lunches for their office staff.  Why two subscriptions for the same thing?  I don’t have an answer yet, (but will keep you informed)

In other words, rent and utilities, for two examples, are not controlled by the business.  They are at a price not determined by the business owner; hence they are called fixed costs.  

In the case of a restaurant, the cost of goods are made up of two things for business owners to look at. 

1.  The actual cost of what you are paying for.

2.  HOW the items that one purchases as cost of goods get used.  

The actual cost of the COGS might be able to be lowered by either negotiating with the supplier or by finding another supplier.  However, if there is a switch in suppliers, you want to try to be sure that you are getting the same quality, especially when it comes to food since your customers might taste the difference if the ingredients (in a restaurant’s case) are inferior quality.  So, that’s a tricky one, especially if you like the quality of the goods that are currently purchasing. 

The other way of lowering the cost of goods, in our case study restaurant case, is to use slightly less ingredients per dish that you create or cook for your guests.  I don’t mean to have smaller plates or dishes, but even if it’s a spoonful less of sauce on pasta, or 2 less pieces of topping on a pizza slice can make a difference in how often you have to purchase more cost of goods, hence lowering your price for cost of goods over the long run. In other words, if you use less COGS, you spend less money monthly on COGS since you don’t have to order as often. It doesn’t sound like much, but it could very well make a difference in your cost of goods expenditures. In most fast-food restaurants, the cost of goods is controlled by corporate, and this is why anywhere you travel to, if you order the same item at one chain of fast food restaurants, the burger, or chicken or fries that you order are always the same taste. It’s the same amount of salt, same amount of mayo, same amount of ketchup, etc. in all 50 states in the US within one fast food chain. 

Any business that has a kitchen and uses dishes, pots, pans, etc. need to clean these items.  The industrial dishwashers usually have a monthly limit on how many loads you can do for the price that you are paying.  If you go over that allotment of dishwashing loads, you get charged extra -- much the same with a copier lease that allow a certain amount of printing before you pay extra by going over that allotment  If it’s found that every month, the business is paying more for the monthly cost of the dishwasher because it’s exceeding the limit included in the monthly price, then the business would need to cut down on the amount of dishwashing loads monthly and that translates to less loads per day.  

Payroll costs are always high.  But, in reality, it could be controlled by the business.  It’s important to know with our case study company what hours during the day and what days are busier and what days are slower on a weekly and monthly basis.  The goal has to be not to have too little staff or too high a staff on duty at any given time. The business should have just the right number of staff to serve people who come to the restaurant to eat. If any workers need to have their hours reduced, I know it’s hard for owners to do that to people, but at the same time, the business has to not only survive, but make a profit to stay open. If a company closes permanently, then the employees have zero hours to work. 

Payroll is one of the hardest parts of running a company as a business owner. If you reduce someone’s hours, you are not only affecting that employees, financial life, but also taking the chance of losing that employee who would need more money to support him/herself or their families. At the same time, your business is more important than any single one of your employees.  You, as a business owner, need to make money and pay your own personal rent and take care of your own family.  So, payroll adjustments are the most difficult thing to do and make decisions about. 

Dishwasher loads are easier. If the monthly allotment allows for 3 full loads a day, for an example, then the business should stride to not go over that limit to save money if needed. 

Even the cost of accounting software could make a difference to small or newly formed companies. Spending $70.00 a month on online accounting software which is $840.00 a year, is more money than purchasing desktop software for around $500 a year, but of course, online collaboration and how much the business owner travels with their own computer has to be taken in to the fold. 

Without a chart of accounts that’s well designed to cover all of these important categories, a business owner can’t make the right decisions on how to make money and move forward. 

The Balance sheet is tougher to read, as it is an accumulation of the numbers from the beginning of the company, not automatically by month like a Profit and Loss Report.  However, your bookkeeper can run a balance sheet on a specific time period in most accounting software.  So, you can look at the balance sheet from 1 year at a time to a month at a time within the current year that you are in. Again, this shows you the monthly car payments, loan payments, credit line payments, monthly equipment financing payments, or any funding that the company has gotten that is being repaid on a monthly basis.  Even though these transactions are not part of the profit and loss, they do diminish the amount of money that the business has in the bank account– hence, it’s all connected.  

Even as a bookkeeper, I have clients who like to go over both the Profit and Loss and Balance Sheet every month with me so that they understand the full picture of the business – that is-- profit (or in rare cases, losses) and how it interfaces with the Balance Sheet. Keep in mind that machinery, computers, and other assets that you purchase for the use of the company are entered into the balance sheet to be depreciated at the end of the year and the depreciation or partial depreciation of these assets end of showing up on the Profit and Loss as a deduction.  So, any monthly Profit and Loss that your bookkeeper will discuss with you isn’t going to be 100% accurate because of the end of year tax rules with the IRS that your accountant or tax preparer takes care of. 

One other thing to mention is the Accrual VS Cash situation. If the bookkeeping is being done on the CASH basis, then the COGS section reflects the money that physically got paid out that month.  If your company is on an Accrual basis and the bookkeeper is putting together the books on an Accrual basis, then technically, the COGS should show the BILLS, and NOT the Bill Payments. The COGS will reflect expenses as they happen, not when they are actually paid. So the numbers will probably be somewhat different. 

I hope this episode has helped you, as a business owner, or a future business owner, understand the larger picture of the business. Most of the other episodes in this series, I have spoken about more specific things like the chart of accounts and the 1099 situation to name just two. This episode was somewhat broader in nature.

Thanks for tuning in, and since it’s November as I record this, happy tax prep/tax season for taxes due between March and May of 2023! 

I do want to mention two webinars that I have coming up – 

1. For the Business Outreach Center, AKA BOC Network, a large nonprofit organization, I am doing a 90 minute introduction to QuickBooks Desktop on December 14th and 

2. For Accompany Capital, also a large nonprofit organization also helping small businesses, on December 15 – a Small Business Taxes Webinar.  

Please email me at Bookkeepermensch@gmail.com or Numerex@numerexonline.com if you would like an invitation to either or both of these free webinars.  

Once again, thanks for listening. I’m Paul Rosenblum