One year after Valentine’s Day, I went to the store and saw that Valentines were on clearance. I don’t know what I was thinking, but I literally bought about four years’ worth of Valentines for my two kids that day. (Hey, they were only $0.25 a box!)
We have all sorts of Valentines to give out at school– including ones with special pens, ones with stickers, and others with tattoos.
One box caught my eye this year. It was the special spy ones– always a favorite with the kids– which included a special decoder sheet to see the secret Valentine message. For a fourth grader, it’s a pretty darn cool Valentine.
It got me thinking of a discussion I was having with a client who was confused by the amount of data on his P&L.
“How do I get to the answers I need to see?” he asked. “It’s hard to know where to look when there is so much information on the report!”
Those who deal with the financials all day have a trained eye to see problem areas. For those that don’t, however, “decoding” the P&L can be a bit more challenging. Like the hidden message on the Valentines, it can be difficult to see what the financials are really telling you.
It’s easy to see positive numbers and think that the business is doing very well, or alternatively, see negative numbers and think that things are all bad.
This is where the secret decoder ring comes into play– it’s called common sizing.
Common sizing means taking every line of your P&L and making it a % of sales. It allows you to get rid of the dollar bias and look at the true performance of your company as it relates to sales. Below is an example of a P&L that has been common-sized. If you look at the areas in red you’ll see changes vs last year.
The surprising thing is, on an actual dollar basis– this company’s profits were up over 17% vs last year! The common sizing tells a different story. Even though in actual dollars the company was positive, this shows us that each of those revenue dollars is less profitable than last year.
So don’t get swayed by dollars alone– pull out your decoder ring and add common sizing to your monthly financial analysis exercise. You’ll “love” how easy it is to spot the issues.