Saturday, December 22, 2007

End of Year Finances - Pt 2

If you haven't read the first post on end of year finances, do so here:

In that exercise you ran a standard QuickBooks profit and loss statement and had lots of fun.

You also built an excel spreadsheet so you can track expenses month after month, year after year.

And now, at last, you know whether you make money in your business. I hope it's good news.

Now we're going to run some tasty reports so you can see more of the details of what your business does.

1. Largest Months

Let's start with Monthly Sales.

Remember that sales are not profit.

Create a report every month that lists the twelve largest months' sales in the company's history. Update this every month once you've settled the previous month's finances. Sort the list from highest sales to lowest. This is very simple. For Example:

November 2007 = $ 10,000
October 2007 = $ 9,500
May 2007 = $ 9,000
September 2007 = $ 8,500
July 2007 = $ 8,000
August 2007 = $ 7,500
January 2007 = $ 7,000
December 2006 = $ 6,500
June 2007 = $ 6,000
May 2006 = $ 5,500
April 2005 = $ 5,000
May 2007 = $ 4,500

As you can see, these are not simply the last twelve months in reverse chronological order. You've got a few real oldies there. With luck, most of these are from the previous year. But reality it what it is.

2. Most Profitable Months

Next we'll look at the juicy stuff. If you created the excel spreadsheet from the previous post, then you have "the bottom line" at your fingertips. That is, you can give the final profit (or loss) for each month.

Note, please, that the largest sales months are not the same as the most profitable months.

If you want to distribute this to your staff, you don't have to give specific dollar amounts. But you should keep track of this.

Make a habit of listening to the financial news networks. You'll notice over time that the most desirable companies make more profit every quarter and pay a higher dividend each quarter.

Try to emulate this.

Focus on the profit and you'll be more profitable.

Focus on the bottom line and you'll improve the bottom line.

3. The Largest Customers

Finally, create a report of the largest clients you have.

We're often deceived because the loudest, neediest clients trick us into believing that they are our most important clients. And we confuse that with profit.

Here's a report that will open your eyes every time your run it. It has two parts.

First, list the ten largest clients based on sales for the last twelve months. List the percent of total sales for each client. Because you list percentages and not dollar amounts, this is a report you can distribute to your employees.


Client A = 12.0%
Client B = 10.1%
Client C = 9.2%
Client D = 8.3%
Client E = 7.4%
Client F = 6.5%
Client G = 5.6%
Client H = 4.7%
Client I = 3.8%
Client J = 2.9%

Total = 70.5% of all sales.

Note: It is not unusual for you to find that 50-75% of your sales come from your top ten clients. Of course, the larger your business is, the smaller will this total be.

Second, run the same report for the five largest clients based on sales for the last three months. List the percent of total sales for each client.


Client A = 10.0%
Client C = 10.1%
Client X = 9.2%
Client D = 8.3%
Client B = 7.4%

Note that the order of clients for the last three months is not the same as for the last twelve months. There are a couple of reasons for this.

First, any client can be in the top 5 at any time. The quarter your smallest client buys a new server and five office license, they can spend $10,000 and shoot to the top. The 12-month figures change more slowly. If you were to lose your largest client (gasp), it would take 1-2 months for them to disappear from the stop spot. And it might take 10 months for them to drop off the top ten list!


At first, these numbers might not make a great deal of sense. But if you run these numbers every month, you can't help but look at them. Among the gems, you are likely to find:

- There are clients who move onto and off of the "largest client" list.

- There are clients who stay on this list for years.

- There are "sleeper" clients that no one on your staff can guess. But there they are, quietly contributing to the bottom line while other clients bluster away but don't contribute much.


An inconvenient truth:

Most sole proprietors could drop every single client outside of their top ten and see only a microscopic change in revenue. They would also see a noticable decrease in expenses. In other words, they'd make more profit.

But almost no one does this.

1 comment:

  1. Yes, most income will come from the 10 largest clients.

    Dropping all other clients to improve the bottom line is an interesting concept. That would give time to "farm" those clients to get their satisfaction scores up.

    But we want to be growth companies. We need to add to those "prime" clients. And the adding will be an upfront expense. So, we save our energy from "go nowhere" clients and spend some toward developing a marketing program, installing a PSA, going to conferences, etc.

    What could be better than skipping that antivirus install for a client that you haven't made a profit on in 3 years and instead going to a conference to learn how to get more clients like your "Top 10"?

    -Ken Edwards


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