Have you ever been shocked by your credit card statement? Surely you didn’t use it that much? How did three cheap lunches, and one pair of jeans, add up to $2,000?
The same thing can happen with your business. All businesses have some sort of quoting mechanism but not all businesses make sure they regularly check all the deals add up to the profit. A lot of “exceptions” can trash the results as easily as it is to blow out your credit card.
One of the most common problems for growing businesses is a disconnect between what your people are selling and the P&L. Quotes to potential clients are often based on a spreadsheet the founder developed years ago. With no mechanism for them to be reconciled back to the P&L it’s easy for them to be out of kilter.
You might remember that your math teacher told you to do the multiplication signs first, and then to do the plus signs. It’s called Arithmetic hierarchy. It’s a good way to think about what happens in your business. Having said that, it may not be immediately clear what to multiply and what to add up.
Your total business margins, the numbers in your profit and loss, are the sum of each of your deals. Each individual deal, less each deal’s direct costs.
The profit of each deal adds up to the profit for the whole business. Sounds simple enough, but If you just add up all the sales and then subtract all the costs you don’t get to easily see what makes it up.
You want to be able to “reconcile” the total of all the deals with the P&L. You have to multiply first (work out the profit on each deal) and then add them all up. Then you can start to see what’s causing any differences. You can see if you have a problem with most of the deals? A “systemic problem”, or perhaps it’s a bunch of outliers that add up fast like charges on your credit card?
Break it down to lunch-sized chunks. Use batches to control your margins.
If your business started out small you would have run on spreadsheets one transaction at a time. Now that you’re getting bigger batches are probably better. Your monthly P&L can equal the batches that month. You can see what batches had problems with margins. If it’s all of them you can start to dig a bit deeper. Maybe it’s a market segment or type of client.
We do this for our clients. We give them the tools to see where their deal-by-deal performance is in line with their expectations. That way they can focus on the most profitable deals and, by the science of multiplication, a more profitable business.
This article originally appeared in the APSCo Magazine.