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If you are puzzled by your profitability, looking at your P&L will give you only part of your answer. If you are trying to figure out why you are not making any more money even though your sales are increasing, or if your bottom line hasn’t moved from the last few years, here are some tips to think outside of the QuickBooks “box.”
Financial Statements are a look in the rearview mirror: They are a print-out of what happened in a given time period—expressed in dollars and cents. If you hired someone, you will see an increase in salary and a reduction in profits. Likewise, an equipment purchase will show up on your balance sheet along with the way you paid for it, a reduction in cash or an increase in loans. This information is useful, but it may not tell you the whole story.
Look beyond the dollar signs: Data from your day-to-day operations (not normally in QuickBooks) gives you equally useful information. Things like measuring output for a given employee, reduced production time gained with the new piece of equipment, or even something like customer turnover. If you were just looking at these measures, however, you might be missing the other half of the story—the translation into revenues, profitability or improved cash flow.
So if you marry up the financial and operational data what do you get? Real information.
Like peanut butter and chocolate, they were meant to go together.
In technical terms, these measurements are often called Key Performance Indicators (or KPIs). They give you insight as to how well your business is being run, not just how profitable it is. Each industry and business has a few KPIs that are leading indicators—they help business owner’s spot trouble before it begins. Maybe a decline in revenues means you should reduce headcount, maybe a higher customer turnover rate means that profits will begin to decline because it costs more to acquire new customers. You probably know what yours are but just haven’t done the math.
KPIs will tell you more than any simple P&L or Cash Flow Statement or Balance Sheet will. So spend the time and do the math for your company—and more importantly track it. You’ll find what you thought was a good predictor of your company may not be as good as a KPI. You might also find that the KPI you use change over time. Today you measure output by employee but 6 months from now customer turnover is a better predictor. Whatever your KPI– think outside the QuickBooks box when you are determining where you want your business to go.