(Members Only) Sometimes I am asked, either directly or indirectly, how important monthly financial statements actually are and do they need to be obtained that frequently, and sometimes my answer is a surprising “no.”
If the stars always seem to be aligned in your favor, and if it seems that virtually everything you touch turns to gold, and your profits and cash flow seem to get better with every birthday, and you are a marketing and financial “whiz” then it is quite possible you could get by with getting financial statements quarterly or even six months.
However, for the vast majority of this industry, I think getting financial statements (a profit & loss and balance sheet) on a monthly basis is absolutely critical. In addition to receiving these statements monthly, there is indeed one more step that needs to be taken and requires that you actually read the damn things!
As amazing as it may seem, there are hundreds of not thousands in this industry that do in fact receive monthly financial statements and yet never read them. They pull open a drawer or open a file folder and toss them in with the best of intentions of analyzing them later but they never do!
The Proper Chart of Accounts
However, in order to really benefit from this monthly analysis, you first need to have one or more documents that you can use to compare the key ratios achieved by “profit leaders” in this industry against your own. One of the best documents published in this industry, a document that has turned many a profit laggard into a profit leader, is the biennial Financial Benchmarking Study. This study is available in our bookstore. NPRC also plans to publish the next study in Feb-March of 2017.
First, let me clarify the term “ratio.” Every profit & loss statement you receive, whether it is prepared by an in-house bookkeeper or an outside accounting firm, should automatically and without question provide the percent of gross sales ratio adjacent to every entry on your P&Ls. That means that if your sales for the month is reported at $70,000 and your paper expenses were $9,000 then next to that $9,000 entry there should appear a ratio of 12.8%. If you’re not getting these ratios now then shame on someone!
It is professionally inexcusable to prepare financial statements, especially profit and loss statements, that end up omitting these percentages. It is not enough that you can calculate them yourself. They should already be there! Every income item and every expense item needs to be expressed as a percent of total sales. No excuses!
Next, your profit & loss statement also needs to match the industry’s standardized “chart of accounts.” Why should it match the industry’s chart of accounts? Because if it does, it will make it so much easier to compare the performance of your firm against others. The general “chart of accounts” was adopted by the original National Association of Quick Printers (NAQP) in 1981 and it has withstood the test of time. The chart of accounts suggests a basic format as to how and where certain expenses should be categorized or listed. By adopting your chart of accounts to this general format, you will have a much easier time comparing your ratios and profitability against others.
Basic Chart of Account Categories
You chart of accounts should, at the very least, breakdown your sales into nine suggested categories of sales. (See free download for an example) Beneath “Sales” should be three other major headings:
- Cost of Sales
- Overhead Expenses
The industry’s chart of accounts suggests general sub-heads for cost of sales and overhead expenses, and owners are free to add and subtract from the suggested list. However, the payroll heading presents a challenge in the sense that even CPAs and bookkeepers tend to mess up where certain entries related to payroll actually end up on a typical P&L.
Put simply, if the expense, in any form or fashion, is related to payroll expenses then it needs to listed under payroll. That would include payroll itself, FICA, SUTA, state and federal unemployment, workman’s compensation, health insurance – the bottom line is that if the expense exists because you employ someone it needs to be listed under payroll!
Where to Place the Owner’s Salary?
Ok, where do you put the payroll expenses for the owner? Note I said owner, not owners. First, you have two options. You can list the salary and benefits for a single owner either under the payroll heading or under general overhead expenses. Regardless of where these are listed, it is important that the benefits and taxes paid on behalf of the owner be separated out from those paid on behalf of the remaining employees.
What about the salary and benefits paid to spouses and/or partners? Where do they go? They should be listed under ordinary payroll expenses. Salaries and benefits paid to spouses and benefits are never considered “profits” and instead are considered ordinary expense of the business. Owners who combine their salary with that paid to a spouse and believe that figure represents or would be included in profits is simply deluding themselves. Unfortunately, that is a topic for a future article.To download a free PDF of a key “Profit Leader vs. Laggard” page from the last Benchmarking Study, Click Here. This sample page also illustrates the “Chart of Accounts” that we are talking about.
The industry’s chart of accounts actually takes the above logic one step further and excludes all payroll, benefit and taxes paid on behalf of or to a single owner. The standard question used for years on the industry’s Financial Benchmarking Survey states as follows when it addresses payroll costs:
TOTAL PAYROLL COSTS – As a further clarification, if there is more than one working owner, then just one working owner with his/her salary and fringes, is excluded from total payroll costs entry. The other owner or owners (if not already expensed elsewhere) is calculated at a comparable net value of their job and added to the entry for total payroll costs.
If that last sentence is a bit confusing let us explain. In firms involving one or more partners or spouses the salary and benefits paid to these individuals needs to be listed as an ordinary payroll entry and included under payroll costs. It the event that there is a partner or spouse that works in the business but does not receive wages or benefit then owners must recognize that this distorts true profits of the firm and at some point would need to be foot-noted in the event a sale was ever contemplated.
Sorts Available in Benchmarking Study
There is a wealth of information contained in a typical benchmarking study. Not only can you find sample profit and loss statements for all firms in the industry, you can also compare independents against franchises, single vs. multiple location operations, firms concentrating solely on digital printing vs offset printing, firms with and without outside sales reps and firms located in various population densities. Most important of all, are the breakouts based upon profitability quartiles, where you will find the firms divided into four equal profitability quartiles where you can readily compare key ratios for basic expense items like paper, payroll, rent, depreciation, etc.
To download a sample page from the 2014-2015 Financial Benchmarking Study simply click here. To purchase the entire study visit our bookstore here. Remember, NPRC members can purchase all studies and publications in its bookstore at 50% off.
For additional information, do not hesitate to contact John Stewart at [email protected] or call him at 321-727-2444.
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