Read Your Numbers: Profit, Cash and Seasonal Swings

Profit and cash are not the same thing

Profit is what is left after you subtract your costs from your sales. Cash is what is in the bank. They drift apart for ordinary reasons: you buy materials before the customer pays, a customer takes sixty days to settle an invoice, you buy a truck that you will deduct over several years but paid for today, or you pay a tax bill that covers last year’s good news.

That is why a busy company can feel broke. Watch both. Profit tells you whether the business model works. Cash tells you whether you can make payroll next Friday.

Read a profit and loss statement in five minutes

A profit and loss statement, sometimes called an income statement, lists income at the top, subtracts the direct costs of doing the work, then subtracts overhead to arrive at what is left. Start at the top and ask three questions. Is income going the way you expected? Are the direct costs, such as materials and labor, a steady share of sales? Is overhead creeping up?

If direct costs are climbing as a share of sales, your prices are too low or your jobs are running over. If overhead is climbing, look at software, vehicles and subscriptions you stopped using. Ask your bookkeeper to categorize consistently, so one month can be compared with the next.

• Income: what you billed
• Direct costs: materials, labor and subcontractors on the jobs
• Gross profit: income minus direct costs
• Overhead: rent, insurance, software, advertising, admin pay
• Net profit: what remains before taxes

Plan for seasonal swings

Landscapers, roofers, HVAC companies, restaurants near a tourist season and retailers with a holiday rush all know the pattern. Money arrives in a burst and the bills do not stop in the slow months. The answer is a reserve built in the busy months and drawn down in the lean ones.

Look at the last two years of monthly sales and expenses, find the low point and estimate how much it takes to cover the fixed costs through it. Then move a share of every good month into a separate savings account until you reach that number. Treat it as a bill you pay yourself, not as spare cash.

Also set aside money for taxes as you earn, not when the bill arrives. Ask your accountant how much to move each month and whether you should be making estimated payments.

The weekly check

You do not need a finance degree. Once a week, look at your bank balance, what customers owe you and when it is due, what you owe and when, and the jobs coming in over the next month. That ten-minute look catches most surprises while there is still time to fix them.

Once a month, sit with the full statements, compare them with the month before and the same month last year, and write down one thing to change. Over a year, those small changes add up.