The first metric you should be looking at when you review your monthly Profit & Loss Statements is “percentage of income.” This is the one to keep your eye on. So powerful.
What is “% of income?” It’s the percentage of each category of cost and expense as measured against the gross income.
This one metric can help you analyze past performance:
- current period against itself
- current period against prior periods
- current period against budget.
- individual products and service profitability
It can also help you construct future strategy:
- pricing structure
- investment needs
In this article, I’ll talk about #1 and #2.
How to calculate it:
The income referred to here is Gross Income, the amount that you receive from your clients and customers for your services and products. (Also referred to as Gross Revenues and Gross Sales, same thing.)
Think of your Gross Income as the 100%. Every other cost and expense on the P&L is divided into the gross income to come up with a percentage, hence the name, percentage of income.
For example, this here below is the P&L for a consulting company.
|Jan – Dec 2015|
|Current||% of Income|
|1 – SALES EXPENSES||3,204||6%|
|2 – MARKETING EXPENSES||2,808||5%|
|3 – T&E EXPENSES||5,934||11%|
|4 – G&A EXPENSES||9,553||17%|
|5 – CONTINUING EDUCATION||18,090||33%|
|6 – WEBSITE EXPENSES||119||0%|
|Net Operating Income||15,401||28%|
I like to start by looking at the big picture first, then drilling down to the details. Start with the bottom line, at the “net profit %.” That’s another name for “Net Operating Income %.” Here it’s 28%. That means that for every dollar brought into the business in revenue the business made $0.28 in profit.
Next, I look at the different types of expenses and see what % of income those were.
Now, information about one accounting cycle is informative, but the beauty of this metric is fully revealed when you use these percentages in comparison to other periods.
|Jan – Dec 2015||Jan – Dec 2016|
|Current||% of Income||Current||% of Income|
|1 – SALES EXPENSES||3,204||6%||15,365||31%|
|2 – MARKETING EXPENSES||2,808||5%||3,000||6%|
|3 – T&E EXPENSES||5,934||11%||752||2%|
|4 – G&A EXPENSES||9,553||17%||6,756||14%|
|5 – CONTINUING EDUCATION||18,090||33%||2,284||5%|
|6 – WEBSITE EXPENSES||119||0%||369||1%|
|Net Operating Income||15,401||28%||21,169||43%|
Now the fun starts. All kinds of questions come up and the answers will inform you on two fronts: by tracking your actuals to see how you actually performed and by giving you information you can use to make changes to set and hit your future targets.
Income was down in 2016, but net profit was up. What? Why was that? Continuing Education, for coaching, were way down in 2016. That explains it.
My next question for the owner to answer would be: Sales were down 10% in 2016 over 2015. Did the lack of coaching have anything to do with that? Had you continued with the coaching do you think you would have increased your sales? Or did that make no difference? The answer to this question will then open up new avenues of questions.
If they think that lack of coaching negatively impacted their sales, what would their sales numbers need to be in 2017 to both get coaching and maintain a 43% net profit margin? $77,231 is what. So now they have a target number for your income budget should you want to continue coaching in 2017.
This is how using this one metric, the % of Income, can both help you analyze your past performance AND help you set your future budgets and targets.
We’ve only scratched the surface of the questions and analysis possible with this one metric. There’s plenty more to come, such as comparing “budget to actuals” and constructing a pricing structure for products and services.
Shoot me any questions and comments and I’ll be happy to address what’s up for you.
Happy number crunching!