Some say the best indication of where you're going is looking at where you've been. This is certainly true of a year-end financial review. While most entrepreneurs think about year-end in terms of taxes, this financial summary is invaluable for forecasting and planning. And as Ben Franklin said, "Failing to plan is planning to fail." Taking a look at where your company stands financially will be the guiding star for what your company can (and can't) do next.
Let's take a deep dive into your profit and loss statement to illustrate. A profit and loss statement, also called an income statement, reports your revenues and expenses for the year. When presented with a profit and loss, most people look immediately at the bottom line: Did I lose money or make money? The goal is to make a profit but when it comes to paying the government, low or no income can be advantageous. Tax strategies aside, the key question is: Am I making money from my services and products? If the answer is no, that's a situation that should be addressed immediately.
But hopefully you are making some profit. And if you're interested in figuring out how to grow your business and put even more money in your pocket, analyzing your last year's numbers can provide useful insights.
It's likely that the size of your jobs vary — in size, scope and services. Say you're in construction. Think about how to group your jobs. For example: new construction or remodel? Residential or commercial? Or a combination, i.e. residential remodel versus commercial new construction? The goal is to find out where the bulk of your jobs came from and the average dollar size of those jobs. This exercise reveals your sales mix — the proportion of revenue from distinct job classifications. You might have one big renovation job and multiple small repairs. Or several large new construction jobs combined with a few remodels. There's no right or wrong answer, but identifying who is hiring you — and how you fared financially on those jobs — is critical.
Being aware of trends is key. Sticking with construction as an example, during downtimes, when new construction is virtually halted, many firms focus on remodels. And in recent years, commercial construction offered opportunity when housing starts faltered. Look through the lens of your own industry and think about what's happening in your business. Are you mirroring or countering industry norms? As we discussed in the first tip: Where is your revenue coming from? Where are the best new opportunities likely to be found?
Now that you've segmented your revenues and taken a lay of the industry you're in, the next step is figuring out which type of job is most profitable. Many a small business has been sunk by that big job that had attractive revenues but was a money-losing proposition. Look at your expenses by job and figure out where you made a profit — or didn't. If you didn't, try to figure out what went wrong. While underbidding can be a factor, some types of jobs (and customers) just don't pay enough for the work you put into them.
In addition to looking at expenses by job, take a look at overall trends too. The cost of construction materials and supplies can be volatile, so stay on top of those. Overhead expenses like insurance or utilities tend to go up every year. By having a handle on your business outlays, you won't be caught short of cash — or charge too little per hour or by the job. A year-end financial review is a perfect time to look at these trends in depth.
Now that you've successfully wrapped up your year, create a plan for the next. If you deliberately seek out and accept customers and jobs that are profitable, you will increase your bottom line. Being aware of trends will also keep you ahead of the competition. And don't forget to identify your strengths and expertise. That is your business advantage.