So now we’ve talked about the planning, the budgeting, solid bookkeeping, and now that we have all that in place, the next step is to get the information we need from the system. So, the question becomes, “What do you need?” And the answer depends on the kind of business you have. Well, for the cleaning business that I have, as an example, what they’ll need is, they will need to know preference per customer, or they can choose to look at it per customer segment or sales segment. Actual labor versus estimated labor, because this is very important for a very labor-intensive business. You want to make sure if you budgeted three hours for a job, you’re actually spending three hours on that job and not twelve. You want to check that the relationship between marketing and sales growth. Again, this depends on if the business is doing any marketing, because sometimes when a cleaning business starts out, they start by doing free marketing. So, they might not even have real marketing costs.
And then you want to track the trend of your general administrative cost and make sure it’s in line with what you budgeted. When we look at your overall profit, you want to look at your overall cost trend, and you also want to look at, to make sure your direct materials are being reimbursed by your customers. If they’re not, then you need to go ahead and invoice your customer and zero that account out. And the reason I’m saying that ’cause that still will be budgeted in our system. And then we want to look at the growth in assets, debt, and equity over time, because at the end of the day we want to see our assets growing, because if we choose to sell, those assets come in very handy, or the equity we have in our business.
Using the Excel file we downloaded in the previous lesson, we can see that customer ABC is not very profitable to us. And that income from this customer is negative $1,213, that’s not good. Even the labor cost by itself is more than what we charge the customers. So, we want to look more into why did we undercharge them. Maybe we’re doing way more work than we say we’re going to do. We quoted them a certain area, and then my employee goes in there and cleans two, three times areas we assigned to that customer. So that’s something we have to investigate, and we have to contact the customer to let them know once our investigation is complete, what our conclusion will be, because obviously, we can’t continue serving the customer. We’re paying them to serve them. We either have to end the service with them or come to a more profitable agreement with them. And if we have a contract, we might just let the contract ride, but once the contract is done, we won’t renew it.
We see customer BDE is profitable. That’s… It’s below what we want it, which is we want it 25%, we’re at almost 19%. But it’s definitely better than custom ABC, which basically were negative 208%. Again, we want to see, “Okay, we’re not quite where we want to be, but at least we profitable with this customer. What did we not price correctly?” So that’s something you want to make sure you look at to see what you did not price correctly. The more accurate your information is, the better you can make this decision, because if you’re spending too much in job supplies or maybe spending too much on something that is very specific to this customer, the only way you can see it is by entering the data correctly.
The best way to analyze a budget comparison reports from your financial software, especially using QuickBooks, it’s to download it and use Excel to do the analysis. This is downloaded and then adjustments are made to figure out the percentage of income for both the actual and the budget. So, we can see in the budget that we’re supposed to be at… We’re supposed to have 39% for labor cost, but we have 37%, so we’re below, so that’s good. And then we look at the rest of them and see where we’re off. If we’re really, really off for a lot of these expenses, we have to investigate why that’s happening. Also, this is showing the percentage of budget we’re at. At this point, we should be at 17%. So, the fact that we’re below 17% means that we are not meeting our goals. So, we can see for income, we’re only at about 2%, so we’re 15% behind where we need to be at this time of the year if we’re going to meet our goal of 306,750. So, this tells us a couple of things; we either need to ramp up our marketing, get things going, we need some more hustle, but if we keep going at the rate we’re going, we’re not going to meet the goal we set. So, this is a good way to motivate yourself to meet the goals that you set out to accomplish. And also, you can see where your… If you see anything here that’s above 17%, you know you’ve already spent way too much. So, we’re all below 17%, so we’re good.
Last thing we want to see is our asset grow over time and also how we gain our asset. Have we been gaining it with debt, or have we been gaining it with equity? So here we can see in this simple balance sheet statement that our asset consists of bank account, which we have $935 left, and we have an equipment which we have a balance of $1,720, the net equipment value. And this has been financed all through our net income of $2,655.83. So, we have no debt, which is good. The reason why we want to track our balance sheet, our asset, debt, and equity is because we want to know how much we have to invest back in our business. Our asset growth will determine how much revenue we can have in the future. If we don’t have enough money, we can’t invest in future growth of the business, so it’s very important to know asset-wise how you’re doing and whether or not you have the cash to sustain yourself in the future.
A business with no cash really is just making ends meet, and it’s not really going to grow much unless he maybe finances the growth through debt. He might decide to get a loan from his bearing from the bank to grow, or he might get investors, which would be equity investment to do that. Well however, you want to see if your net income is growing over time, the net income is going to increase your cash, and whatever assets you might have like equipment, which you can use to generate more revenue in the future, ’cause that’s the goal of assets; the goal of assets is to generate future revenue. So that’s something you do want to keep in mind as you grow your business, is you need the ability to generate future revenue.
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