Food business management from an expert food business consultant can help your food business succeed. Profit and loss is the difference between being a successful food business, or a food business in chaos. Here’s the second 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 to improve your profit and loss statement with effective strategic management.
In the first installment, I focused on comparing two months—one that was for a profitable, and one that wasn’t. I looked at the differences between May 2015 and September 2015, two months that on the surface looked quite similar; but May was way more profitable than September. As I starting looking into the pretty significant increase in cost of sales in September, one big realization jumped out at me: my Profit and loss reports have one category called “Ingredients.” It is so large and vague, it tells me no information about my business, and which part of my “Ingredients” is causing me a problem.
If your Profit and loss categories are way too big; they don’t show you the nuance contained in that category. There’s a lot of information buried there. You need sub-categories!
Let me walk you through an example with “ingredients.” The way I have it set up now for the Noe Valley Bakery, it is a catch all for everything we purchase to make our baked goods. When I look at my Profit and loss report, I just have one line that represents all the flour, butter, sugar, chocolate, decorating supplies, etc. It works fine if there isn’t a problem, but the minute we have an unexpected price increase, I don’t have information as to which ingredient is causing of the increase without scouring through every invoice and doing a lot of manual calculations (and honestly who has time for that?)
What we want is for our financial report to give us the information we need automatically, so we avoid all the unanswered questions and the lengthy inquiry process.
After scrubbing my Profit and loss report here is what my new “Ingredients” sub-categories will look like:
Flour and Grains
Grocery (everything else)
This new method will tell me exactly where my problem lies within the category, so I can focus my attention and get to the solution faster.
Creating sub-categories will give you the information you need to understand and fix your cost of sales problem.
Ok, I know what you might be thinking at this point: “Mary I don’t have time for this. I barely get to talk to my spouse at the end of the night, much less take on a reporting and inventory overhaul.”
I know the feeling. I get it. I used to feel exactly the same way. I felt that detailed expense coding was a waste of time. But now I would argue that you can’t afford not to have good routines when it comes to reporting. Really, getting in good habits now is the key having accurate information which allows you to make good management decisions.
Think of it this way: Clean reporting = a clear mind space. Messy reporting will only lead to a chaotic way of running a business and a stressed state of mind.
If you’re along with me for the ride, this is your homework for this week:
Pull out your chart of accounts.
Highlight your top three biggest expense categories.
Write down all of the sub-items that go into that category and create sub-categories within the larger expense category.
Either you (or your bookkeeper) create those new sub-category accounts on your chart of accounts in your accounting system. Break down what you buy into those new sub-categories by breaking down your invoice totals before they get entered into your accounting program.
I look forward to helping you get a better grasp on your profit and loss statement while teaching you the keys to business success and increasing profits.