- September 28, 2020
- Posted by: Dan Gordon
- Category: Accounting Advice
When I look at a set of financials, my sole objective is to determine within one minute if the company is profitable and if the revenues and expenses are in line with standards that we’ve created for the pest industry. At year end, I’m looking to see how I can reduce my tax burden to its legal minimum. How do we create reports that concisely give us the state of the company?
It all starts with your company’s chart of accounts
Surprisingly many new clients we work with use a generic chart of accounts, one that an ice cream store or any other generic business can use. These charts are usually created such that an accountant can prepare the year-end tax return. The fact is that the IRS is looking for bottom line profits to tax. The expense categories they want broken out are on the tax return. While useful for calculating taxes, they provide little in the way of management reporting.
While preparing tax returns is one use for a Profit and Loss Statement and an important one at that, the management information derived from a properly prepared set of financials is extremely important in growing and improving a pest management business. As such, the goal should be to present the firm’s financial information in a manner that allows the owner or manager to determine his or her true costs by department within one minute of picking up the statement.
Group Revenues by Division and Service Agreement Type
The most important revenue is recurring revenue. In pest management, because most of us run divisions defined by skill set or marketing groups such as commercial, residential, termite and other services, we keep those as major headings. Most routing programs used in the industry allow you to do this. The trick is bringing the information as well as the related customer payments and accounts receivable over into a general ledger program such as QuickBooks in such a fashion that both programs reconcile to each other.
By segregating revenues in this manner, the successful owner or manager is able to determine the type of work he is doing and how much he can expect to repeat in the future when budgeting.
Group Expenses by Direct Costs, Marketing Costs, Sales Cost and General and Administrative Costs
Direct Costs are costs associated with putting a technician on the road or your true operational costs. These costs include technician wages, benefits, payroll taxes and uniforms. In addition to the costs associated with the technician himself, the cost of his truck, auto insurance, fuel, materials and others are also all direct costs.
Marketing costs and sales costs are often confused. Marketing is all activity to produce a customer lead. It includes advertising in print, online, direct mail, etc. Sales costs are all costs associated with converting those leads into sales. They include salesperson wages, payroll taxes, benefits, sales vehicles and all associated costs.
General and administrative costs are those costs that don’t fit into the categories above. Usually these costs are known as fixed costs as they are fixed over several volumes of business. They usually include cost of running the office, as well those other management costs.
The Importance of Gross Margins
Direct costs essentially indicate the cost of your operation. The gross margin, or gross profit as some financial professionals call it, is the revenues minus the direct costs. By looking at the gross margin we can determine if we are operationally efficient. It also tells us if we have done enough revenue volume to cover our non-operational costs (i.e. marketing, sales and fixed) and allow us to show a reasonable profit. Essentially, determining what our breakeven point would be.
Compare Results with Industry Benchmarks
Using the above methodology for report design, the owner or manager can easily determine his true profitability. The owner manager can further benefit by measuring these results against industry benchmarking standards. Many well-prepared Profit/Loss statements compare the current year results against the prior year both for the current month and the year to date.
The most successful pest management professionals also create an operating budget by month and measure their actual results against the budget to measure their level of success.
Compute variances with standard
Once the “One Minute Profit/Loss Statement” has been set up with actuals vs. the benchmark column (either prior year or budgeted amounts), it is important to see how the actual current year’s results match up. To this end, I recommend a column showing the variance between the current year results and the benchmark selected so that the pest management professional can easily determine if he or she is ahead or behind the “target.” The variances provide a starting point for the business owner to ask hard questions about why the company may or may not be measuring up to last year’s performance, or this year’s budget. These questions provide the basis for management changes required in order to improve performance.
Producing a “One Minute Profit/Loss Statement” that meets its objectives through the steps above doesn’t need to be difficult. General Ledger programs like QuickBooks are easily adapted to generate financial statements that meet these criteria. A competent CPA can help you set up QuickBooks and take information from your routing program and marry it with QuickBooks to produce the one-minute manager reports. Let us Know if we can help as we provide monthly one-minute manager reports as part of our month end reporting for all our clients.
Daniel S. Gordon is a CPA in New Jersey and owns an accounting, consulting and business brokerage firm that caters to PMPs throughout the United States. Visit www.pcobookkeepers.com for information about his firm, PCO Bookkeepers. He can be reached at firstname.lastname@example.org