Can anyone tell me why a profit and loss account is made for a specified period of 12 months or a balance sheet as on a particular date? Most answers I get are for income tax purposes. In the last 4 years of our firm’s existence, we have been instrumental in developing and maintaining the Management Information Systems (MIS) for several start-ups and SME’s. It’s found to be most beneficial for organizations that have several revenue channels either in the form of various customers / projects or products or geographies. At times it is strange to be engaged by organizations who have already invested in high end ERP’s and still can’t make sense from the enormous data available at their disposal. Many times too much of information is the issue. It is important to know what is the data you need to have at the end of every month for important decisions? I can decode the same into the following sections:
A simple monthly profit and loss account: Many times businessman wait till the end of the year to realize that the net profit which they expected to generate has not really happened. Frankly they are keener to have their financial statements ready for tax requirements. However, when they glance at the statement either they are surprised or shocked. But have no clue about the reasons. Further they are at a loss to understand where and when did the problem occur, if so it did. A monthly profit and loss account when generated enables one to understand and decode the performance every month. More important it allows you to take remedial measures almost immediately. It is also important to keep your accounts team on its toe’s.
Sales analyses: It’s important to analyze every number herein as this is where the game starts. It is important to understand various channels of revenue. Whether it’s the trend of product wise sales or customer or the geographies to which your products go. It is very important to do a variance (year on year movement) and percentage to total sales (contribution of each revenue constituent to total sales) analyses. Many times the cause of your additional costs for a particular month is hidden here. It is also the reason you do business so spend some time on these numbers. Any future decision making pertaining to expansion can also be decoded through sales analyses.
Profit centers: Once you know the overall profitability it is very important to know where the profits are derived from. To do that it’s important to know which your cost centers are. Generally, they coincide with the revenue channels. A methodical study will enable you to apportion all costs even till the last rupee to such revenue centers. Many times surprising reasons are thrown up. It tells you that certain revenue centers are actually loss making in nature. It enables you to either renegotiate prices, terminate such products. We have had clients who have given up before such analyses saying our clients are MNC’s. They would not agree to any revisions. It’s been extremely gratifying when a logically prepared cost sheet has convinced MNC’s to give them their due share. In case of hospitality for instance it is important to analyse each revenue stream – room rent, F&B, banquets etc independently. We have noticed that the negative performance of F&B many times drags the other two down.
Debtors/working capital analyses: A neglected area generally. Many businessmen ask. My P&L shows good profits, but where is the money? The answer it’s being enjoyed by your customers. Credit period is either not set or adhered to. An ageing analysis is a simple solution. It enables knowledge on the overdue culprits.
Cost / budget sheet: It is made to feel to be rocket science but is not. Use the last two year data to budget the future. Go into the depth of the activity. Start with sales giving respect to the trends observed over last few years. Any aberration has to be factored out. Once sales freeze look at the costs. A manufacturing company should also give a lot of importance to product cost sheets. An exercise should be attempted to compare the actual product costs with costs sheets to understand the variances. It helps to tighten controls or to revise an incorrect cost sheet. For this it’s important to track material issue to a product etc.
My advice to all entrepreneurs is, fall in love with your numbers. Most say I don’t understand much of accounts. It’s convenient but not advisable. Don’t allow external and internal factors to take advantage of your chosen ignorance. Go ahead. Develop your own small MIS. It is fun.
*Ashutosh Kharangate, managing director, Mangal Analytics and Research Consulting Pvt.Ltd.