Chances are you’ve had a health checkup in the recent past. You know the routine: A doctor listens to your lungs, checks your blood pressure, draws some blood, and does a few other exploratory diagnostic procedures. The process might occasionally be uncomfortable, but it’s a crucial part of catching any larger health problems before they become life-threatening.
As a business operator, you’re the doctor and your business is the patient. You have to keep its vital systems running smoothly, keep its lifeblood flowing, and uncover any unusual problems or concerns before they metastasize and threaten its long-range viability. And the profit-and-loss (P&L) or income statement is your primary diagnostic tool.
“The profit and loss statement keeps a score on how healthy your businesses is,” says Dave Coyle, operator of Maverick Cleaners in Wichita, Kansas. “It is absolutely as critical as finding out you have elevated cholesterol, which could be a silent killer. The same is true in business: If you’ve got a silent killer and you don’t have clear optics on it, it will take down your business.”
Managing Care
Like an annual physical, constructing a P&L statement isn’t most people’s idea of fun. Many operators farm the task out to an accountant or bookkeeper, their reports are likely year-end versions designed for filing taxes that won’t inform you of any developing issues or opportunities in a timely manner. Only a “managerial” P&L conducted on a more frequent basis can do that.
“A P&L that comes from a professional or QuickBooks is good at rolling up the year-end taxes,” Coyle says. “But it’s not a very good managerial tool. A managerial P&L will include variable expenses to show whether or not you’re going to be profitable or not profitable in business.”
Performed at least monthly, managerial P&Ls provide a snapshot of revenues and expenses allocated by department. “You need to list every expense,” says Perry Bullard, operator of B&S Drycleaners & Laundry in Varnville, S.C., and a past DLI board member. “Everything needs to be broken down as a percentage of income: electricity, utilities, fuel, insurance, taxes. Labor is your No. 1 expense.”
Percentiles help determine whether costs are up, down, or stable in relation a particular revenue stream regardless of the dollar amounts coming in. In its most basic form, the monthly P&L should include line items such as:
- Revenue streams and sales
- Cost of goods sold (includes supplies and labor)
- Gross profit (revenues – cost of goods sold)
- Operating expenses (rent, sales costs, etc.)
- Operating profit (gross profit – operating expenses)
- Additional income (example: income from sale of equipment)
- Interest, taxes, depreciation and amortization
- Net profit (earnings – interest, taxes, depreciation, and amortization)
“Used with a balance sheet and cashflow statement, a P&L provides an in-depth look at a company’s financial performance, business health, opportunities, threats, and valuation,” says Diana Vollmer, managing director of Ascend Consulting Group and leader of DLI’s Inner Circle management group. “A P&L reflects a company’s ability or inability to generate profits by increasing revenue, reducing costs, or both.”
Diagnosing Problems
If it sounds complicated, it doesn’t have to be. You can start with a computer program or online spreadsheet. “When I started, we didn’t have computers,” Bullard says. “My dad showed me how to do a P&L using different-colored pencils. We’ve come a long way.”
Coyle uses a streamlined monthly P&L that groups all utility costs (gas, electricity, water, internet, and phone) into a single category. “The managerial P&L is simple,” he says. “It gives us kind of a snapshot to see if anything’s really out of line. It’s another set of optics that shows when things get out of whack as a percentage of your sales.”
Use it to look for anything that doesn’t make sense, such as an unusual spike in utility costs — maybe the new guy forgot to turn the boiler off, or a steam trap is in desperate need of maintenance. Or perhaps labor went up 5% in November. Did you hire seasonal help, or did a tight labor market force you to pay higher wages? Maybe you’re wasting money by staffing and servicing a location that doesn’t produce. The P&L helps find symptoms of what might be a business hiccup or something much more threatening.
The biggest red flags usually present as high labor and facilities costs. Vollmer provides maximum benchmarks of 28% for labor and 10% for rent to maintain profitability. There are exceptions to these guidelines, of course — based in New York City, DryClean NYC owner Elton Cerda says he can’t follow the 10% rule on rents.
On the revenue side, underpricing is a silent killer in today’s inflationary environment — and a big problem in wash-and-fold, which many operators price as a loss leader. “If we treat it like commodity, we’re not going to capitalize on the profit that can be made there,” Vollmer says. A P&L “can cause you to recalibrate and price things right.”
Many successful operators track the biggest numbers more frequently. Bullard’s operation, for example, tracks labor costs weekly and adds utilities, insurance, and taxes into the monthly P&L. Coyle uses a dashboard to monitor production and sales daily, comparing the numbers to expenses such as utilities and supplies in a weekly “Monday Metrics” report. “There aren’t a lot of surprises when we get the monthly financials,” he says.
Coyle cautions operators not to view expenses as costs, but as investments. For example, paying rent helps keep current clients, as do excellent customer service and production personnel. “If you view expenses as costs, you always want to lower them,” he says. “Almost everything on the expenses side of a P&L statement should lead to one of two things: maintaining the clients we have already or helping us get new clients. Increase expenses if you can justify it with higher sales.”
A Prescription for Profits
Once the P&L provides a look at what’s creating healthy profits and what’s wearing them down, you can use it make better business decisions. “Operators who don’t use P&Ls often think they’re doing great based on cashflow, and that’s not a true measurement of the health of your business,” DryClean NYC’s Cerda says. “Unless you know where you’re making a profit or losing money, it’s hard to know whether your operation is running as efficiently as it could.”
Comparing profits between months can uncover general trends, but seasonal shifts in the fabricare business make comparing successive months less useful than comparing one period against the same period a year prior.
“Twelve months is when your P&L really starts paying off,” Bullard says. “Compare it to the same week or same month a year ago. Should we run a special in a slow month in order to get more pieces? These are things you can find out. Don’t wait for your CPA to give you an end-of-year report, because by then it’s too late — you already have 12 months you may have screwed up.”
The worst thing for an operator to do is to avoid checkups or ignore their results. Refer to the P&L’s numbers for every business decision and share them with key team members. “Most drycleaners look right to the very bottom of the P&L and say, ‘How much profit did I make?’ then put it on a shelf,” Coyle says. “[As a result] they just keep doing what they’ve always been doing, and they keep getting the results they’ve always gotten.”
“If you allocate your expenses as they should be allocated — showing the expense against the revenue stream — you’ll know which parts of the business are profitable, which ones are not, and which ones to expand,” Vollmer says. “That’s different than having sort of a general feeling. Too many operators are sailing on a hope and a prayer.”
“Once you make the money, you want to keep the money,” Coyle adds. “This is where a lot of people go astray; they look at topline sales and say, ‘Oh, sales are up 20%.’ But if they spend it as quickly as they make it, they’re not keeping the extra money. The P&L really helps you focus on that second pillar — making sure you keep the money. You don’t have all those leaky holes in the bucket.”
Comparing Your Vitals
Coyle admits that he didn’t follow this advice for his first decade in business, focusing only on sales and marketing. He then figured out that his business was ailing after working with a mentor. “The business’ No. 1 responsibility is to provide you, the owner, with cashflow,” the mentor told him. “If the cash isn’t flowing to the level you want it to, something’s wrong, and you need to fix it. The problem is not the industry you picked. The problem is how you’re operating the company.”
Peers, mentors, and industry management groups can provide valuable benchmarking and other advice, although many operators are reticent about sharing their numbers even with nondisclosure agreements. “It’s better if you can be part of a group that can give you their P&Ls and tell you what percentage of sales each category is,” Cerda says. “Then you can figure out where you are and what you may be able to work on. A P&L is way more useful when you can compare it to another company.”
Many operators take a Pollyannaish approach to business, believing that if they provide great service and a quality product, profits will magically materialize. But if you don’t put the proverbial oxygen mask on first, Coyle says, you may ultimately sacrifice your business’ health — and its ability to take care of customers. “If you don’t take care of your own financial house, taking care of everyone else will be very short-lived. You’re basically sacrificing yourself to help other people.
“These systems are super-important,” Coyle adds. “They allow us to focus on what we should be focusing on: making money, keeping money, and growing money. Life isn’t all about money, but if you don’t have any, life becomes all about money. You have to elevate yourself and get things to where the business is creating significant cashflow for you to live the life you want to live.”
You can use a P&L to build routes, close unprofitable stores, negotiate with landlords — anything that warrants attention and helps make your business strong and healthy. “A P&L allows you to know what you’re capable of, it allows you to address the weaknesses in the business, and it allows you to capitalize on the opportunities,” Vollmer says. “It’s essential to any business planning. It’s the difference between running a business and going to a job.”
Ian P. Murphy is a freelance writer based in the Chicago area.