In full disclosure, the only accounting course I ever took was Accounting 101 during my freshman year of college. I dropped that course because the grade I was destined for was too painful to contemplate. (I soon overcame such ‘trivial concerns about grades’ which unsurprisingly ultimately led to the premature end of my college career.)

Everything I am about to share with you is straight from the entrepreneurial trenches of Cincinnati and is 100% organic, completely free of any trace of any academic training.

The little I remember about Accounting 101 had to do with esoteric terms such as double entries, T-accounts and debits and credits, basically, accounting mechanics in which, even today, I have no knowledge nor interest. My perspective is as an entrepreneur and my focus is to ANALYZE your P&L to help you better manage your business.

There are FIVE MAJOR CONCEPTS to grasp or you will find yourself focusing on the trees rather than the forest.

1. Why even bother? IRS requirements aside, a P&L is a critical tool for measuring profit performance of your business over a period of time, say, a month, quarter or year. Why is profit performance important? Because profit is akin to cash generation which is (should be) a major financial driver behind your department or business.

2. Forget dollars, focus on percentages. Simply put, YOU CANNOT ANALYZE WITH DOLLARS. Let’s say your profit is weak and you and I have a conversation. When I ask you how much you pay for rent and you tell me $10,000 per month, $120,000 per year, I have learned nothing. However, if you tell me that, over the most recent year, 25¢ of every dollar (25% of revenue) was paid to rent, I can tell you right away that your rent is on the high side relative to total revenue. (Note: absolute dollars are helpful in deciding where to focus your management time. See #3 below.)

3. Focus on the biggest dollar categories first. Let’s say that your office supplies consume 3¢ of every revenue dollar (3%) and your total payroll consumes 50¢ of every dollar of revenue (50%). Let’s also say you have 20 hours to spend reducing expenses. It is highly likely you will shake loose far more profit by spending that time learning strategic ways to reduce payroll rather than shopping the office supply stores for the best deals on pens, pencils and inkjet cartridges.

4. Comparison data brings greater perspective. You will gain increasingly greater value from your P&Ls after you have collected data for a while and you are able to compare, say, your profit performance for this February versus last February versus the February before. Collect the data and keep your P&Ls handy, at your fingertips. As everyone at Kids First will tell you, any time there is a decision I will go reaching for our binders.

5. Organize your P&L to get the information you need to see. This subject can get a little complicated so I will only mention it here with a promise to delve a deeper in Part 2, next month.

Let’s go back and take a look at a couple of examples of percentages compared to total revenue (see item #2 above). Let me give you a couple ‘down and dirty’ target percentages that are pretty handy when it comes to analyzing businesses in our industry. First, a qualifying statement: not all businesses are the same and not all targets are appropriate for all businesses.

1. Total Payroll (included in this number are: officers’ salary; all payroll taxes but not employee benefits). Total payroll is virtually every gymnastics school’s largest category therefore it is the one that needs to be most carefully managed. As for a target, in the ‘early days’ I aimed for 40¢ of every revenue dollar (40%) to be consumed by total payroll. That 40% target was achievable for a few years however as our business and the industry matured (in particular, the public began to expect better customer service; the decline of the volunteer mentality; my personal desire to no longer ‘do it all’) 40% began to be unattainable and I my target crept upward until it reached about 50%. For most gymnastics schools with a team (as opposed to non-competitive only), 50% seems to be a good target and allows for a healthy profit margin. Organizations without a team might be able to target 45%, possibly lower. Interestingly, at Kids First, Sports Center, in recent years we have once again been able to lower our target to 42-44%. However I consider this to be attributed to our unique model which has about two dozen profit centers supporting all fixed expenses.

2. Combined Rents + Debt Service. This category is also a biggie, typically the second largest. I like to combine rents AND debt service together in order to establish this percentage. My thinking is, the more that a business pays for any loans, the less it will be able to pay into rents and vice versa. In most instances, 15% is a good target for this category. The business that has this category up near 25% will likely be able to ‘stay in business’ but will be perpetually struggling to earn any meaningful profit.

Let’s put these targets into practice and look at them relative to the $120k rent example mentioned in #2 above. If your rent is $120k and you are seeking a healthy profit, simple math shows that you are going to need to generate revenue in the range of $800k ($120k ÷ 15% = $800k). On the other hand, if your goal is to simply ‘stay in business’ (yuck, what a bummer thought), $480k should do the trick ($120k ÷ 25% = $480k).

There you go for now. I hope I touched on something that will help your business in a meaningful way. In Part 2 I will explain the unique way Kids First Sports Center organizes its P&L to give us the more granular information we seek.

Until Part 2. Jeff Metzger

Jeff is the founder of several industry-related businesses including Kids First Sports Center and the Small Business BOOT CAMP, a total-immersion leadership, marketing and management workshop for career-minded industry professionals. With graduates from every continent, BOOT CAMP has helped launch or catapult thousands of businesses. If you are serious about perpetual growth and profit for your business, BOOT CAMP should be MANDATORY TRAINING.