Your Q1 results set the trend for the year
Finance BY ROD BRISTOL
Quarterly Checkup
Your Q1 results set the trend for the year
If your business is on a calendar year , you ’ ve finished your first-quarter operations . Hopefully , your accountant or bookkeeper gave you your financial reports by April 15 — both an income statement and a balance sheet — and you spent time reviewing them . So , how did you do ??? If you set up your financial information for maximum “ management intelligence ,” you now have a very accurate picture of how your business is performing . Your financial statement should have given you your 2016 first-quarter results compared with your 2015 first-quarter results , and also compared your results with your annual plan for the first quarter of 2016 .
Let ’ s talk trends
• Revenue . Up or down ? Compared with last year , are you ahead ? If so , did you meet your plan ? If not , what happened , and how are you going to fix it ? Remember : “ Financial data is absolutely worthless unless it drives operational improvement .”
• Cost of goods sold ( COGS ). Up or down ? If your revenue is up , has your COGS increased faster , eroding your gross margin ? In one of my previous articles I gave you an assignment to find a 2 percent improvement ( by that I mean a reduction !) in your COGS this year . So , at the end of first quarter is your COGS down a full 2 percent from where you were last year ? If not , why not , and what are you going to do to fix it ?
• Gross margin . Increasing revenue and decreasing COGS drives up gross margin . However , many businesses find themselves in the exact opposite predicament ( decreasing revenues and increasing COGS ), which dramatically erodes gross margin . Where are you ? Remember , small percentage points really add up over the course of a year . If your gross margin is down a full 1 percent in first quarter 2016 over first quarter 2015 , there should be huge alarm bells ringing in your head . Go find it , and don ’ t let it go ! If this continues over the course of a full year at an annual sales volume of $ 1 million , you could have
Your first quarter results are critically important and set the trend for the rest of the year . Don ’ t ignore them ! Find out what ’ s happening inside your business and , if necessary , fix it . No one is going to do it for you .
eroded $ 40,000 of gross margin by yearend . This is totally unacceptable !
• G & A expense . ( This means everything below the gross margin line .) Your other assignment was to find a 2 percent improvement in all of these costs . Did you achieve it ? If not , what are you going to do about it ? The only way you ’ re going to get a cost down in your business is to drive it , beat it , whack it , and punch it down . None of your vendors is going to come to you and say , “ Oh by the way Bob , we ’ re giving you a 2 percent price decrease this year because you ’ re such a great customer !”
• Owner ’ s discretionary profit ( ODP ): That ’ s everything you take out of the business for yourself . Up or down ? Usually when a business ’ s operating profit is down , so is the chunk you get to keep . Your goal this year was to improve what you paid yourself a full 5 percent of your gross revenues . “ Are you there yet ?”
Balance sheet Now let ’ s take a look at your balance sheet — at two critically important ratios : your current ratio and your debtto-worth ratio .
• Current ratio . Remember , this is calculated by dividing all your current assets ( everything coming in and converting to cash this year ) by all your current liabilities ( everything you have to pay out in cash this year ). This measures your ability to pay your bills . The bank is looking for a 2:1 current ratio , meaning that for every dollar you have going out on the bottom of the ratio , you have two dollars coming in on the top . How do you measure up ? Is your current ratio up or down from last year ? If it ’ s down , why , and what are you going to do to fix it ?
• Debt-to-worth ratio . This measures that all-important four-letter word every banker hates and every business owner should carefully understand about their business : risk . Is your risk up or down this year ? To calculate your debt-to-worth ratio , divide your total liabilities by your net worth . This will give you a very clear measurement of how much more or less risky your business has become at whatever your sales level is at the end of first quarter .
For every dollar of net worth on the bottom , you have X dollars of debt on the top . In a recent benchmark study we just completed , the range was from 3:1 to 5:1 . Let ’ s put that into words : in the worst-performing operations , for every dollar the business owner owned they owed three dollars in debt . In the bestperforming operations , for every dollar the business owners owned they only owed 50 cents in debt . Yes , you can have a bigger , weaker company . If you do , you need to fix it , now .
Your first quarter results are critically important and set the trend for your financial performance for the rest of the year . Don ’ t ignore them ! Find out what ’ s happening inside your business and , if necessary , fix it . No one is going to do it for you .
Rod Bristol is executive vice president at Profit Mastery . For over 30 years , franchisors and franchisees have improved their financial performance and unit profitability by following the Profit Mastery process : financial training , benchmarking , and accountability / bankability modeling . Learn more at www . profitmastery . net , 800-488-3520 x13 or email bristol @ brs-seattle . com .
74 MULTI-UNIT FRANCHISEE ISSUE III , 2016