Quick Start to P&L Management

Presented by: Frank Coker

CompTIA Faculty

CEO, CoreConnex

CompTIA Channel Training

About this EducationThe content and materials featured in this presentation are the result of a collaborative, CompTIA community-led development effort. An advisory group comprised of channel leaders and technical experts identified training goals and objectives, while education specialists carried out development work based on the insights and information provided by the advisory group and other subject matter experts.

About CompTIACompTIA is the voice of the world's information technology industry. As a non-profit trade association advancing the global interests of IT professionals and companies, we focus our programs on four main areas: education, certification, advocacy and philanthropy.

Why Manage Your P&L?

• Improve Cash Flow• Know Where to Invest and How

to Grow your Business• Make Incremental Improvements• Identify Problems• Increase Business Value• Know where you stand in

comparison to peers• Provide company leadership

Context

Accounting System

P&L(Income

Statement)Balance Sheet

Analytical Tools(Dashboard)

Operations Systems and

Tools

P&L Anatomy

Sales (revenue)

Minus COGS (cost of goods sold)

Equals Gross Profit (gross margin)

Minus Expenses (SG&A / overhead)

Equals Net Profit (profit)

Steps to Successful P&L Management

You can’t manage unless you measure!

Managing a P&L requires:

1. Accounting data collected be organized and collected at right level of detail for analysis

2. Metrics from the data be summarized and compared appropriately (“dashboard”)

3. Analysis happens periodically and routinely

4. Management action is taken based on analysis

What Is The Ideal?

Healthy P&Lrevenue increasing faster

than expenses

Unhealthy P&Lexpenses increasing faster

than revenue

Required: must monitor monthly trends

The Ticking Time Bomb

Hidden Problem:If margins do not grow as fast or faster than revenue (same as saying

COGS growing slower than revenue), new business is probably damaging the

bottom line and may mean company is not scalable.

(good)

(good)

(bad)

(bad)

Chart of Accounts – The Road Map

• Chart must be at right level of detail– Most frequent mistake is

for the Chart to be too general…

• Don’t leave design to someone who doesn’t know your business!

• Design, implement and then adjust over time

Chart of Accounts

Account # Account Description

Revenue

Product Sales

4101 PC's, Laptops, Tablets, etc

4102 Servers

4103 Printers

4104 Telecommunications Equipment

4105 Cabling

4106 Packaged Software Orig. Licenses

4107 Packaged Software Renewals/Maint.

4108 Misc. Product Sales

Time & Material Services

4201 T&M Services - Installation Svcs

4202 T&M Services - Repair/Maintenace

4203 T&M Services - Software Consult

Key Metrics - Gross Margin

• Why is Gross Margin Important?– GM = Revenue – Costs– GM% = GM / Revenue

• What are Lines of Business?

Revenue Product Sales

T&M Service

Project Services

Managed Services

Total Revenue

Cost of Sales Product Sales

T&M Service

Project Services

Managed Services

Total Cost of Sales

Gross Margin Product Sales Margin

T&M Service Margin

Project Services Margin

Managed Services Margin

Total Gross Margin

Gross Margin % Product Sales Margin %

T&M Service Margin %

Project Services Margin %

Managed Services Margin %

Total Gross Margin %

Chart of Accounts -- Defining Lines of Business

• Line of Business (LOB) – Different economics– Different business activities

• Record your Revenues AND Costs by LOB

• Consider using Industry Templates:– Service Leadership Inc.– Corelytics by CoreConnex

Standard Lines of Business

1. Product Sales (Resale of Hardware/Software)2. Managed Services

3. Project Services

4. T&M Services

5. Other

Ensuring Meaningful Gross Margin Metrics

• Revenue Data Collection – – Break down invoice line items by LOB– Make sure bookkeeper/accountant records receipts by LOB

• Cost Data Collection – Attribute costs as closely as possible to LOB– Product and Material costs should be separated by LOB– Separate out operational expenses by LOB as much as possible

• Record/allocate Salaries / billable and unbillable time to LOB• Record/allocate benefits/payroll taxes • Office, Training, Office equipment/laptops, etc., and Travel

expenses• Don’t allocate overheads (SG&A) accounts

SG&A and SG&A Metrics

• Selling, General and Administrative (SG&A) Expenses are costs not attributable to a LOB – Sales Expenses (not direct to LOB - indirect) – admin salaries,

benefits, office/technology equipment– Marketing Expenses (indirect) – same as sales expenses– Executive Salaries/expenses– Rent, utilities– Corporate Expenses, e.g., taxes, business licenses, insurance,

legal, accounting, HR, internal info systems, etc.

• SG&A Key Metric –Line Item as a Pct of Revenue– E.g., Rent % Revenue = Rent / Total Revenue

SG&A Expenses % of Revenue

Expense $ % of Revenue

6200 Sales Expenses (Indirect) $354,109 8.9%

6300 Marketing Expenses (Indirect) $108,876 2.7%

6400 Executive Salaries and Benefits $169,321 4.2%

6501 Rent $83,209 2.1%

6502 Utilities $4,808 0.1%

6600 Insurance $2,543 0.1%

6800 Legal Fees $5,584 0.1%

Total SG&A $728,450 18.3%

Compare yours to industry averages (see Corelytics)

Getting to the Key Metrics

• Foundation is the Chart of Accounts

• Simple, but Key, First Level Metrics– Gross Margin by LOB/

Business Model– Gross Margin %– SG&A Line Items % of

Revenue

• Simple Metrics tell you where you are now

Are You Improving?

• Comparison to Prior Months, Quarters, YTD

• Margins and SG&A• Caution: Seasonality• Historical Data• Compare

– whole dollar amounts – growth– percentages – relational

improvement or efficiency improvement

This Yr Last Yr Variance Var %

Revenue Product Sales $900 $850 $50 5.9%

T&M Service 120 140 (20) (14.3%)

Total Revenue $1020 $990 $30 2.9%

Cost Product Sales $800 $730 ($70) (9.6%)

T&M Service $80 $100 $20 20%

Total Cost of Sales $880 $850 ($50) (3.5%)

Gross Margin

Product Sales Margin $100 $120 ($20) (16.7%)

T&M Service Margin $40 $40 $0 0%

Total Gross Margin $140 $160 ($20) (12.5%)

Gross Margin %

Product Sales Margin %

11.1% 14.1% (3.0%) (21.3%)

T&M Service Margin %

33.3% 28.6% 4.7% 16.4%

Total Gross Margin % 13.7% 16.2% (2.5%) (15.4%)

SG&A Sales Expenses $30 $25 ($5) (20.0%)

Marketing Expenses $35 $45 $10 22.2%

Total SG&A $65 $70 $5 7.1%

Are You Meeting Your Goals?

• Goal may be “Budget” or “Forecast”

• Goal Comparison to Months, Quarters, YTD

• Margins and SG&A• Same Caution re.

Seasonality • Compare

– whole dollar amounts– percentages

This Yr Goal Variance Var %

Revenue Product Sales $900 $925 ($25) (2.7%)

T&M Service 120 110 $10 9.1%

Total Revenue $1020 $1035 ($15) (1.4%)

Cost Product Sales $800 $780 ($20) (2.6%)

T&M Service $80 $90 $10 11.1%

Total Cost of Sales $880 $870 ($10) (1.1%)

Gross Margin

Product Sales Margin $100 $145 ($45) (31.0%)

T&M Service Margin $40 $20 $20 100%

Total Gross Margin $140 $165 ($25) (15.5%)

Gross Margin %

Product Sales Margin %

11.1% 15.7% (4.6%) (29.3%)

T&M Service Margin %

33.3% 18.2% 15.1% 83.0%

Total Gross Margin % 13.7% 15.9% (2.2%) (13.8%)

SG&A Sales Expenses $30 $25 ($5) (20.0%)

Marketing Expenses $35 $38 $3 7.9%

Total SG&A $65 $63 ($2) (3.2%)

ALERT!!

Do NOT increase revenues when:• Expenses are growing faster than revenue, OR• GM is growing slower than revenue, OR• Cash is falling as revenue increases

You generally cannot grow your way out of unhealthy ratios. Companies that try this fail in large numbers. First you must fix costs or pricing problems and then move forward with growth. If your ratios are unhealthy because of an investment, remove the investment expenses from the analysis and see if the problem still exists.

How Do You Compare to Your Peers?

• Benchmarks – To industry peers– Based on Line of

Business / Business Model

• Benchmark comparisons only as good as your data

What Benchmarks Exist?

• Corelytics© by CoreConnex, Inc. (www.corelytics.com)

• CompTIA sponsorship of Corelytics Financial Dashboard• S-L Index™ Included in Corelytics

• S-L Index™ by Service Leadership, Inc. (www.service-leadership.com)

• S-L Index™ Comprehensive Diagnostic Report©• S-L Index™ Quarterly Comprehensive Report©

• Trend analysis graphics• Benchmarks• Business model calculator• “Bolt on” for data from Your Accounting System

– QuickBooks (automated)– MYOB (Australia, New Zealand - automated)– Other Accounting Systems (file import)

• Goal tracking• Adjust data – try “what if”• Share progress to your team

Dashboard Features

Your Financial Trends in Graphics

Dashboard for Financial Picture

1. Where are my current hot spots?

2. Where am I headed?

3. What’s my potential future?

4. What’s working and what isn’t?

5. How do I compare with my peers?

6. Am I on track with my plan?

7. How is my staff doing?

8. What are the key messages for my team?

1. Where Are My Current Hot Spots?

Leading Indicators show the current performance picture

By line of business

Peer benchmarks

Compare to peers

Track your goals

S-L Index™ benchmarks and the Predominant Business Model© (PBM©) are proprietary to Service Leadership, Inc.

2. Where Am I Headed?

Use the “big picture” to understand your trends

By line of business

Peer benchmarks

Basic trend lines

Your goalsS-L Index™ benchmarks and the Predominant Business Model© (PBM©) are proprietary to Service Leadership, Inc.

3. What’s My Potential Future?

Forecast your future high and low scenarios

By line of business

Peer benchmarks

High and low scenarios

Your goals

S-L Index™ benchmarks and the Predominant Business Model© (PBM©) are proprietary to Service Leadership, Inc.

4. What’s Working and What Isn’t?

Drill down to see where action is needed

By line of business

Peer benchmarks

Expense drill-down

Your goals

5. How Do I Compare With My Peers?

Your business model has unique industry benchmarks

Your revenue mix

Using the PBM® Calculator

Your model

S-L Index™ benchmarks and the Predominant Business Model© (PBM©) are proprietary to Service Leadership, Inc.

6. Am I On Track With My Plan?

Define measurable goals, then track progress

Your goals

Peer benchmarks

By line of business

Chose any metric

7. How Is My Staff Doing?

Compare your payroll metrics to industry norms

By line of business

Peer benchmarks

Multiple metrics

Your goals

S-L Index™ benchmarks and the Predominant Business Model© (PBM©) are proprietary to Service Leadership, Inc.

8. What Are Key Messages For My Team?

Create a monthly summary to communicate priorities

Set goals

Show progress

Set priorities

Assign responsibilities

• Meaningful business planning• Visualize business finances• Set & track goals• Monitor the bottom line• Drill into detail – profitability by line of business• Compare to top performers• Compare to same business model• Forecast performance• Communicate internal priorities

Gives Small Business a Big Tool

Monthly Management Process: 30 Minute Action Plan

dashboard

Recap

• Design Your Chart of Accounts with Line of Business as a driving factor

• Get all direct costs into GOGS• Analyze Key Metrics

– Current State:• Gross Margin and Gross Margin % by LOB• Expenses as a percent of revenue

– Are you Improving? Comparisons to Prior Periods (Months/Quarters/Year-to-Date)

– Are you Meeting Your Goals? Comparisons to Budget/Forecast

– Where Do You Stand in Comparison to Peers? Benchmarks

References and Additional Materials

• CompTIA website (www.comptia.org) – Member Resource Center – under Business Management Finance

• Corelytics – www.corelytics.com/• Sign-up at – CompTIA.Corelytics.com• Service Leadership – www.service-leadership.com

CompTIA Benefit:

Free Financial ReportSee your trends, financial strength and future forecast

Free Financial ConsultationCompTIA members get consultation with Financial Expert

How?• Email: support@corelytics.com• Subject: Financial Strength• Text: Your contact information & your

current accounting system

Questions?

Thanks!