Here’s the third installment of my series Where’s My Money Going? In this series, I am finding the money leaks at my artisan food business, Noe Valley Bakery and patching them up. I am documenting my process so you can join me in examining your own business and keep more of your profits in your pocket.
In the first installment, I focused on comparing two months—one that was profitable, and one that wasn’t. In the second installment, I taught you how to use subcategories on your P&L to create reports that give you more information when there is a problem. In this installment I will show you another tool to make your Profit and loss tell you everything you need to know without having to do extra research.
Your monthly inventory.
When we looked at the Profit and loss example with subcategories in the last installment, we were getting closer to having a complete picture of our expenses. But even after we added the new subcategories, my P&L is still only telling me part of the story; it is only telling me what I purchased – not what I used. If I have a sudden increase in my cost of goods in one of the subcategories (if my cost of butter goes way up), my Profit and Loss leaves me with unanswered questions: Do I have a ton of extra ingredients in the walk-in and storerooms? Did I over-order? Did I get a huge delivery on the last day of the month? Or…do I have a real cost problem?
You need to take a monthly inventory!
By taking an inventory every month on the last day and entering those numbers into my accounting system, I know how many ingredients I started the month with and how much is in storage at the end of the month. Now, my Profit and loss will pinpoint exactly what I used during the month. This is critical, because there is a huge difference between over-purchasing and over-using. Over-purchasing is a much easier problem to fix; I can set up smaller pars and a system to order only what I need to function. The other problem of over-use may be a problem with waste, theft, or maybe my prices are not high enough.
What makes up a good inventory? First off, (for those of you who are dreading doing an inventory) you DO NOT have to inventory everything in your whole business if you don’t want to. You can choose a few important or cost impacting categories from your Profit and loss and inventory. The important thing is that once you have chosen those categories, you need to be consistent in doing your inventory every month.
In the case of Noe Valley Bakery, we inventory all of the cost of sales categories totaled by their sub-categories. We count our grains, dairy, grocery, and produce in our ingredients section. We count our coffee, tea, dairy and grocery in our coffee section, and we count our finished products in the walk-ins. We also count our packaging because we frequently buy packaging in bulk to save money. We may purchase 6 months worth of stickers at a time, taking advantage of price breaks so our price per sticker saves us money. If I don’t inventory those stickers, then I’m expensing all 6 months worth at the time I make the purchase. If I inventory them, I will expense them only as they are used. Taking a monthly inventory also gives me the extra benefit of cleaner stockrooms and more accurate ordering because my managers are organizing and counting everything once a month.
If you’ve been following along, you might be wondering how all this change has impacted profitability at Noe Valley Bakery. Stayed tuned for next month, where I’ll go back to my Profit and loss report to share the results of my “leak stopping” exercise. Learn the difference between what you purchased and what you used in a month. Taking a monthly inventory is the key.