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There's Money to be Found in the Differences

There’s money to be found in the unnecessary costs of your business.

Checking and reviewing your numbers is key to making decisions, but there are also benefits to looking at the numbers from the viewpoint of seeking out the differences.   

Differences can be found in several ways:

1. COMPARE THE LAST MONTHS’ PROFIT AND LOSS STATEMENT TO THE MONTH BEFORE.

What numbers look the same, and what numbers look different? For those that are different, do you know why they’re different? If you can provide an explanation, that’s great, but if not, delve deeper into the numbers to see what caused the difference.

THERE’S MONEY TO BE FOUND.

I was talking to the co-owner of several tourist accommodation properties, and she told me the story about when they’d bought a new property and got the first energy bill.

The energy bill was ten times the amount they were paying for another existing larger property they owned. Something was definitely different and not in a good way. 

After investigating, they discovered that the newly acquired property had the hot water service running 24/7 for all the units in the complex, so whether someone was staying or not and whether the hot water was being used or not, the hot water was being heated and circulated. 

Armed with this information, over a period of time, they switched each of the units in the complex onto a zip hot water heating system and have reduced the energy bill back down to a reasonable level.

2. COMPARE THE LAST MONTHS’ PROFIT AND LOSS STATEMENT TO THE SAME MONTH THE YEAR BEFORE.

Again, ask the same questions, what numbers look the same, and what numbers look different? For those that look different, do you know why they’re different? 

What tends to happen over time is we add in more costs and expenses, so what shows up in this analysis are those extra costs.

Have a good look at them and consider whether they are necessary or not and then cancel and cut out those unnecessary or unused costs. There’s money to be found in these unnecessary costs.

WHILE HAVING A LONG LIST OF EXPENSES IN YOUR PROFIT AND LOSS STATEMENT MAY FRUSTRATE YOUR ACCOUNTANT, IT’S IMPORTANT TO HAVE VISIBILITY OVER THE DETAIL FROM A MANAGEMENT PERSPECTIVE.

If you find over time that you are regularly delving deeper into some of your expense categories to find out what’s in them, those are the ones I’d recommend you split out. Make sure they are visible on the profit and loss statement each month without the need to delve deeper.

3. COMPARE THE LAST MONTHS’ PROFIT AND LOSS STATEMENT TO YOUR BUDGET.

Yes, you should have a budget if all the numbers are in alignment with the budget, great. If not, why are they different. 

Differences aren’t always bad news. You may find that when you’re looking at your revenue against the budget that you’ve done better than you had thought you would.

Alternatively, you may find that your net profit is more than you had expected it to be.

With these types of differences, take a moment to enjoy the result, pat yourself on the back, congratulate the team on a job well done and celebrate.

Now don’t go overboard and spend money on the celebration (unless it’s a super out of the ball-park type of difference) but make sure you soak it in. Then keep going and see if you can replicate the results again the following month.

SEEKING OUT THE DIFFERENCES, YOU’RE LOOKING FOR THE GOOD NEWS, WHAT WENT BETTER THAN LAST MONTH, LAST YEAR OR AGAINST THE BUDGET.

You’re also looking for what cost more than last month, last year or you’d planned on spending.

With these, consider what made you decide to add those costs and whether they are ongoing and potentially whether they were intended to replace other costs which haven’t been eliminated yet.

Next time you’re looking at your profit and loss statement (which I recommend you do monthly), check for the differences and see what you find. There may be some more profit hiding there in costs you don’t need to continue to have.

Originally published on www.smallville.com.au
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