02/05/2025
Your P&L sucks. Here's why...
Sadly, most P&Ls aren't valuable. You look at the top, look at the bottom, and then judge whether or not the month was "good" or "bad."
This is because most P&Ls are structured by accountants, and accountants care about their purpose for the P&L: recording data according to GAAP (generally accepted accounting principles). Makes sense.
But here's the problem with that...
A P&L managed purely through GAAP will never tell us three important stories that can transform the P&L from accountant document to powerful business tool.
P&L Story 1: How profitable is our business model?
This is the number one measurable to solve for from an entrepreneurial point of view. If your business model isn't profitable and scaleable, everything else is a waste of time.
This means, we have to put in the extra work that most accounting nerds will not do, especially if you are an agency or professional services. You must take the time to separate out the labor, software, etc. required to deliver what was sold to clients.
Unfortunately, I come across lots of P&Ls where all in-house employees are just lumped-in to some sort of "salary & wages" account. This means that if we are in the business of selling services, we have zero clue about how profitable our service model is.
You have to put in the work to put all expenses related to the people, software, etc. that are part of the client delivery machine into a "cost of goods sold" or similar top-level expense category.
And this includes "sub-contractors"! Too many accountants are putting these people in a "sub-contractors" account OUTSIDE of the expenses related to delivering the service. Or, they're put near the very top as if they are some sort of "pass through, not to be made money on" kind of item. This is a crime. The labor you gather to deliver services is your product and you should have a margin on this labor whether in-house or out-of-house.
P&L Story 2: What is the ROI on our efforts to grow top-line revenue?
Every bit of "sales" and "marketing" expense should be accurately tracked and separated into a "Selling Expense" major category (often referred to as "S") so that you can understand the ROI from these expenses.
I say "ROI" because you must look at your expenses in this area as an investment. And as an investor, you should regularly ask "What is the ROI on my investment?".
Once you track this, you can then calculate:
Added Revenue Contract Value / Selling Expense = ROI
Are you getting 7-10X?
P&L Story 3: What are we spending to provide general support to this organization?
Every other expense that is not part of delivering the offering and not part of adding top-line revenue (rent, utilities, general software, perks, etc.) goes into the next major expense category: General & Administrative Expense (often referred to as "G&A").
This will tell us the percentage of revenue we're spending to support the organization at large.
How can I help you take action on this?
