Q3 Is Over. What Are Your Numbers Telling You?

Start your Q3 financial review with the Profit & Loss.

Run your Profit & Loss for January through September and compare it with the same nine months last year.

Look at:

• Revenue
• Gross Profit
• Gross Profit Margin
• Operating Expenses
• Net Profit
• Net Profit Margin

Don’t stop at revenue.

Suppose sales are up 12%. Sounds good.

But suppose gross margin fell from 42% to 36%.

Here’s the part that can surprise you:

If last year’s sales were $1,000,000 at a 42% gross margin, you generated $420,000 of gross profit.

Increase sales 12% to $1,120,000—but earn only a 36% margin—and gross profit falls to $403,200.

You worked your way through another $120,000 of revenue and ended up with $16,800 less gross profit.

That’s why revenue alone can be such a lousy scoreboard.

Your Profit & Loss says you made money.

Your bank account seems to disagree.

Sound familiar?

We covered this earlier in Project Lighthouse:

profit and cash are not the same thing.

At the end of Q3, revisit that lesson with nine months of actual results.

If the business shows $150,000 of profit but cash hasn’t increased anywhere near $150,000, find out where the difference went.

Maybe it went into:

• Accounts receivable
• Inventory
• Equipment purchases
• Loan principal payments
• Owner distributions
• Owners’ personal estimated tax payments made from the business
• Deposits or prepayments
• Paying down other liabilities

None of those things automatically means something is wrong. But you should be able to explain the difference.

And look in the other direction, too.

If cash increased by more than your reported profit, understand why that happened as well.

You might be holding customer deposits, sitting on unpaid vendor bills, borrowing money or seeing the effect of non-cash expenses such as depreciation.

Again, those things aren’t necessarily problems. The important part is knowing they’re there.

Cash-basis business? Some of these differences work differently when your books are maintained on the cash basis, particularly accounts receivable and accounts payable. The important question remains the same: can you explain what happened to the cash?

Dollar amounts tell only part of the story.

Margins tell you how efficiently the business is producing those dollars.

Compare your Q3 and year-to-date margins against:

• Last year
• Earlier this year
• Your budget or target, if you have one

Pay particular attention to Gross Profit Margin.

But before assuming the business changed, make sure the accounting didn’t.

If labor, subcontractors, materials or other costs were classified differently this year—between Cost of Goods Sold and operating expenses, for example—your gross margin can change even though the underlying economics didn’t.

Make sure you’re comparing apples to apples.

Once you know the accounting is consistent, start looking for the operational reason behind the change.

If revenue is climbing while gross margin is falling, something underneath the business may be changing.

Labor may be costing more. Materials may have increased. Pricing may not have kept pace. Jobs may be taking longer. Discounting may have crept in. Your sales mix may have changed.

Don’t immediately assume you know the answer.

Here’s another place where total revenue can fool you.

Your biggest customer may not be your best customer.

Your busiest service may not be your most profitable service.

And your largest job may not have produced your best margin.

By the end of Q3, you should have enough activity to start separating the winners from the work that’s simply keeping everyone busy.

Ask:

• Which jobs produced our best margins?
• Which customers consumed more labor or management time than expected?
• Which services consistently performed well?
• Where did estimates differ significantly from actual results?
• Where are we generating revenue without generating enough profit?

This is especially important for contractors and other job-based businesses.

If your accounting system says a job made 25%, but labor, materials, subcontractors or other job costs never made it onto that job, you’re making decisions from an incomplete number.

That’s exactly the problem we explored in

QuickBooks Job Costing: Why Your Job Profit Is Wrong
.

This is one of my favorite parts of a Q3 financial review.

Don’t just compare this year with last year.

Compare the business now with where it stood at the halfway point.

If you completed our

Mid-Year Financial Checkup
,
you already have a useful starting point.

What changed during the third quarter?

• Sales accelerated.
• Gross margin slipped.
• Payroll increased.
• Receivables started taking longer to collect.
• One customer became a much larger percentage of revenue.
• Cash reserves improved.
• A new employee or piece of equipment started paying off.
• A problem you spotted in June got better.

Or maybe it didn’t.

That last one matters.

If you identified a problem at mid-year and nothing changed during Q3, don’t carry it quietly into Q4.

Ask why.

Now turn around.

Stop looking backward and look at the next 13 weeks.

Conveniently, October through December is almost a perfect window for a

13-week cash flow forecast
.

Start with the cash you have today.

Then estimate, week by week:

• Customer collections
• Payroll
• Vendor payments
• Loan payments
• Taxes
• Insurance renewals
• Year-end bonuses
• Annual software and subscription renewals
• Equipment purchases
• Property taxes, where applicable
• Owner distributions
• Other significant cash needs

Now you can see trouble before it arrives.

Maybe November gets tight.

Maybe a tax or insurance payment creates a heavy cash week.

Maybe year-end bonuses and annual renewals pile up at the same time.

Maybe you have plenty of cash to make that equipment purchase.

Maybe you don’t.

A bank balance tells you how much cash you have today.

A 13-week cash flow forecast helps you understand what that cash needs to do tomorrow.

This is where your Q3 financial review becomes financial management.

Don’t finish your Q3 review with:

“Interesting.”

Finish it with decisions.

Pick the two or three things that would make the biggest difference between now and December 31.

Then give each one an action, an owner and a deadline.

Notice what we’re doing.

We’re not simply producing reports.

We’re turning financial information into actions, owners and deadlines.