Financial Info You Need to Know
So the last thing that we're gonna talk about is different ways of calculating profitability. And I mentioned earlier that. Okay, that's QuickBooks. And then we skip setting a persistent We did that. Okay, we in the break, we originally we're gonna put up the slide, but let me just just a really kind of set the scene here to prompt you to think about something. How does your current profit compare with others in your field? OK, this varies greatly. In other words, for other people in my business house, my profit level. And if I'm not at the same level, why is that okay? I mentioned the grocery stores or grocery stores have a profit level of maybe 1 to 3%. 123 cents profit on every dollar sold for a grocery store. It's a very thin margin for friends of mine who are in the construction business. Particularly difficult economy. These guys air working on building, adding onto buildings and hospitals and all that. Those guys were operating at about a 5% profit margins very thin. So the ques...
tion to spur your thinking is how does your profit compared to others in your field? and now I'm going to say something that is not very pleasant. But as you're going through this prophet discussion, you need to have a frank conversation with yourself as to long term. Can I make enough profit for this to make sense for me financially again? We don't have the answer today, but long term can I make enough money in this venture for this to be profitable for me Now, maybe you don't intend it to be a full time business. Maybe you're a nonprofit. But if this is going to be your business, you need to carefully think about Can it be profitable enough? Long term. I'll tell you a story on that note. Um, I was helping three brothers write a business plan to buy a pizza business that was very successful in the Northeast, in Pennsylvania, it was a regional pizza business pizza parlor, and they were gonna buy a franchise and put in ST Louis. One of the brothers was a golf pro. The other two brothers sold envelopes. Do they know anything about the restaurant business? No, they did. So I'm helping him set up this business plan and they show me the financials, and this is a critical point. Maybe not for today, for you, but down the road. And I said, You know, if you look at all the expenses of your business, there's no salary for you guys. You've got You know, you've got a 10% profit margin, but that's not enough to support the three of you. I don't think well, we're willing to do the business. We they essentially said, we all three hate our jobs so much that we're willing to do the business and, um, figure out how to pay ourselves later. Well, that's not a good idea. I understand that emotionally and passionately, they wanted to do it, but I couldn't in good conscience say that makes sense. They couldn't come up with a business plan that had enough to pay themselves long term. Now, the creative folks that are watching this course or in a different boat because their business is pretty static, you know, here's how much a pizza business can make. I mean, you know, pretty static. Most of you are in businesses where you've got tremendous potential for growth and going in all kinds of different directions and building people in all kinds of different ways. I don't think you really have this problem like somebody in a very static, structured business does. But think about it as we go through. Okay, so there's really four points. Is my business profitable? To what degree? How profitable should my business be compared to others? I'll give you an example. So I went out. I feel like I put this course together like five years ago. It seems so long ago and I went out and I started Googling. And this is what I would suggest You do go out and Google. Uh, photography, profitability. And what I was looking for was newspaper articles, industry publications, kind of, you know, third party resource is that would explain profitability for photographers. I got a wide range. It was anywhere from 5 to 20% profitability, depending on type of business, how long they've been in business. So I suggest you guys do the same thing, and most of you, I would think they already know that it sounds so basic because we just covered the income statement earlier. Getting the formula at the top. Revenue or sales, same term, less expenses equals profit. we saw that. What's the answer? Profitability when your revenue exceed sales. But now let me throw out a caveat. Which is is a total company profitability? Or is it profitability by client? Here's what I mean. Um, yeah, you're doing project work, and you consistently bill clients for more than it costs you to do the business. OK, but what about when you take into account assets like equipment that you have to buy for your business rental space? Your website. I had a discussion with one of the producers about I really want to ramp up my website. It's please pretty plain. Okay, that's a big investment. So not only do you have to be profitable, but she had to be profitable enough to cover all those other expenses that you incur. Okay, some algebra. I've been waiting all day. Finally sent algebra. Um, now what? University? Kansas. A freshman year. I was an architectural engineering measure. You may notice that I am not an architectural engineer. Now. Part of the reason I'm not archetypal engineer is I had a five hour 8 a.m. calculus class five days a week, and it was, uh, just brutal and the guy, you know, he's just very kind of unkept guy. And I'm just looking at this guy. So anyway, I'm not a big math whiz, and I know that most of you are not. But we do have some very basic formulas. These are all the there, also on the bonus material, the formulas. And this is one profit margin. Real simple for every dollar you sell, How much of it is profit? So, for example, I sell a package of photos for $ with a $45 profit, 45 divided by 300 15% profit margin or, in other words, for every dollar sold. I make 15 cents now. Is that good? Bad? I'm not sure. It depends on your business. Okay, so how profitable Real basic profit march big Big box stores like Best Buy or another example very, very, very thin profit margins. What friend Who has a business who trains people in big box stores like Best Buy on how to sell Electron ICS? And he always talks about how for such a massive organization, the profit level is razor thin, razor thin. So I suggest that you researcher industry that could include, you know, attending conferences, whether live or online reading industry publications. Yeah, um, doing web research. Maybe there. Maybe you find a chat room for people in your business. Maybe it's a local, um, trade organization. Okay, So, research best of all, get a mentor, talk to somebody that you know who's already in that business. I had a really good mentor. Several who helped me along the way. Um, and that was probably my best source of information. Was a mentor really nice to have Okay. Talked about that. When should buy business be profit? I had a conversation at lunch about this. For some businesses, it may take several years to get the profitability. That's perfectly reasonable. Okay, a lot of that depends on the second bullet point. So the 1st 1 for most of this audience, your profitable with the first order that is individual projects or orders or profitable. You Bill, you have these expenses, your profitable, right? From the very order First order. But if you're in a business where you have large startup costs, that may require the business to operate at a loss for a period of time. Okay, so you got to think about that. Um, good example, C p A friend of mine who have a lot of respect for We built a huge brand new strip mall shopping multipurpose area outside of ST Louis. And a lot of them were his clients, cause this c p a office was nearby, and I helped him with during tax time want I don't like to do taxes, but I did help him out in a pinch. And he was telling me, you know, all those businesses in the valley I said, Yeah, he goes, You know what? Half of those business they're going to go out of business this year. I said, What are you talking about? He said all of them signed five year leases for the most part, with the property manager. And guess what happens this spring? All the leases run out. None of them are profitable enough to keep the Lisa's an expense. And they're all gonna as soon as the leases over, they're going to shut their doors and do something else. And he was right. Half the stores in that strip mall closed because all their police agreements ended and they all closed half of them closed. Why? Because they had a large start up expense, that monthly lease that they could no longer afford. The great thing about this business, your businesses are you don't have to have the brick and mortar expenses like we used to. Um, when I think about my circle of friends, more than half of my circle of friends not only are self employed, but don't have an office. And I'm 51. I mean, I'm not Ah, young, creative start a person. Guys in their 40 late forties and fifties, Not only are they self employed, they don't have offices. Were all working at home while I'm working in the coffee shop. Um, we're all we're gonna We don't have these large costs anymore like we used to, Which is fantastic. Best thing about this online about technology increases. You don't have to have an office if you don't want to. Okay. Really, really important. So, for example, your starting a restaurant, um, you need an investment to lease the space. You gotta build it out, which is what's going on. Not only a creative live but next door. You gotto restructure the building, build out advertised furniture and equipment. So let's say you add that up and it's $200,000. Somebody just opened a brand new restaurant, which is something near my house. It's pretty nice. So I'm there with my wife and there's a group of guys and it's six o'clock on a Saturday night. And these guys, these guys have been having fun for a long period of time. These guys air have a lot of fun of this new bar. So I talked to the one guy and I said, Where were you guys? Because we have a great train system in ST Louis, you can still take a train. So they went out to wineries outside of ST Louis, and now they took the train back and this guy sitting next to me on a stool, he can barely stand, and he asked the bartender for a glass of water. He goes, Yeah, I'm gonna drink this water slack and sober Open. Go see my girlfriend And I thought, I'm glad I'm not there to see that. I really I really feel for you. Course. My My wife just looked at me and rolled her eyes, and it was pretty funny, but that build out of that space of that restaurant had to be 1/2 $1,000,000. Now the restaurant tour is a very experienced restauranteur in ST Louis, and this is a guy who knows what he's doing, so he can, from his experience, take that risk. And we have a dozen families in ST Louis that are Italian families. We have great Italian food as good as New York or anywhere because we have fought to 12 families in ST Louis and they're all Italian and they all run these fantastic restaurants, and he's one of these people, and he knows he's going to get that build out money back because he's done this four times before, he said. Four restaurants, which it's very hard to make it as a restaurant, and he's done this. So let's say that our restaurant tour is a 10% profit margin. The question is, how much in sales will he need to generate to cover that $200,000 cost? And the answer is again some algebra. If I take 200,000 divided by 10% he's got to get two million in sales toe earn back the $200,000 build out. He knows this. He's a restauranteur. Not only has he done it but his father, and it's great they've been doing this for years. They know they have got this down. They know what they're doing. He knows how long it's gonna take to earn it back. He knows now much of the 200, the build out the equipment, that stuff in the kitchen, the tables is assets invested in the business, not immediate expenses. And Josh and I think, had this conversation earlier today that if you have assets of any dollar amount, that's meaningful to you. Post that as a separate asset in QuickBooks posted as a separate asset in QuickBooks, so you can track it. Okay, now let me tie this back to some things. We learned about the income statement. Bear in mind that that $200,000 in spending if it's on assets that those assets are going to be depreciated over time. So as he uses the tables in the ovens and everything that shares to make money, they're going to depreciate in value. We're going to recognize depreciation expense. Which brings me to another question. Another point. If I were going in to buy a restaurant, I would want to know not only the assets that they had. I would want to know depreciation on each one of those assets. Why do you think that, IHS? Why would I care? Yes may consider that in your offer for the business. Exactly. Right. I'm going to consider that the offer. My business. When do I have to replace all this stuff? So the technical jargon for that is is that you've got an asset. Less depreciation is something we call book value. The asset less depreciation on the asset. That expense is something called book value. So I want to look at the book value of the assets. Now, QuickBooks is great at this because QuickBooks will list every asset, the depreciation of each asset so you can see the book value. So if I look at the oven and I see that it's a 30 year old oven with 27 years of depreciation, I'm gonna look at the owner and say, you know, I got a knack down this price because I got to replace the other. Okay, So bear that in mind in a situation where you're may be considering merging with somebody else. Okay, maybe Christine's the filmmaker and she wants to create an entity and collaborate with somebody else, and she's gonna bring equipment and they're gonna bring equipment. And the question is, how was their equipment? Now, I think intuitively everybody knows to do that. But hopefully that person's got financial records with assets and depreciation. You could look at financial statements and see that. What about if your partner with somebody and you have assets that appreciate as opposed to depreciate? And how do you account for that? Like if you know, you own a building and it's gonna like each year, especially if you're in San Francisco, right, the price is gonna go up. So how do you account for that? Great question. And I'm glad you brought it up because I need to cover. So your friend buys a building for $500,000 and, um, they put that in the business as their contribution, and that's their equity. So now they have equity of $500,000 and the business owns a $5000 building is an asset now brings up a couple of accounting questions. Accountants, not surprisingly, are conservative. We have a principle of conservatism in accounting, which says, When in doubt, do the most conservative thing. So what part of that rule says if it's an asset, we put it on the books that its historical cost and we leave it there. But you say to yourself, Well, that's not really fair because this building's really grown in value, which grows the value of our company because we could sell it for a gain or we could take a loan out against it because of the fair value. All true. All true, however, that only gets recognized in the financial statements if you sell the building. In other words, the fair market value does not get in the financial records. However, it's certainly an asset quote unquote in your business. It just doesn't get recorded in the financial records. There are a lot of assets like the building. Example. The goodwill that we talked about earlier today, the intellectual property, the secret sauce. These things don't get recorded, the accounting records until somebody buys them from you. But that's a great problem tohave. That's what I'd love to have that problem. It just doesn't get recording the financial state. Is that okay? Okay, one more. I have a friend. You had a catering business. See what she was? This is hard to say. She was a sushi chef. Don't say that three times fast at a really good restaurant in ST Louis. And then she started. She had kids, her first child, and she started pastry business where she was making pastries and shipping them to local restaurants. So whenever we get together with them, we bag to come over for Beth House for dinner because it's like a five star meal. And all I have to do is bring Why is great. Does anybody work in or know somebody who works in the catering business? To me, that's a really tough business. Does he have the also of that opinion? That is a brutally tough business. Um, there was a guy who runs. We have a restaurant chain found in single is called pasta house or friend of mine Ram Pasta House catering for them, using the restaurants, recipes and food. Um, for the catering. This guy was managing 20 events a weekend. Can you even imagine. Tucker How much staff You have 20 events. The weekend crazy. So think about a catering business where there's a fixed menu and they show up and here's the menu and they serve it and they clean it up and they leave. Okay, we don't normally get that in my house, but it does exist, so I have my example. Private parties assume five clients by the same menu. Same basic menu. It's $50 per person sale price. The food costs $ and there's a $10 cost for the hourly rate for the staff to serve and for travel. So your profit is the owner of the catering businesses. 10 bucks, which 10 divided by five would be a 20% margin. $10 divided by $5. This gets back to coaching your clients. I use this analogy in one of the books that I remember which one. So let's say that to clients sort of run off the rails a little bit. They don't do what you expected them to do. So the first client watch your staff to stay and clean up afterward for like, a long time, and your agreement is well you know, my staff's gonna clean up the food and put it away and wipe down the counters and we're gone and your clients got him vacuuming and they're they're on our extra. Is that a cost to you? Sure. So that's a higher labour cost. So your profits lower. The other client under counts their guests, which means you have to scramble and show up with a whole bunch more food, which requires more prep time for you. It requires more driving time for you. And if you don't have the ingredients, do you think they're more expensive? You gotta run at the last minute. Sure, both of those clients lower your profit level. So how do you resolve a couple ways? And we talked about when we talk about the invoice in the late fee, which is you gotta lay this out in advance. Um, I've gotten pretty good at this in my business, which is a lot of saying, Here's what I charge. Here's what you're going to get. Here's what I don't do. Here's when you can reach me. Here is the best way to reach me, etcetera, etcetera. So are our caterer. Needs to say you need to understand, Mr Clyde, that were Here's what We're going to stay afterwards and pick up the food and wipe down the counters, and that's the extent of what we're gonna do. Are you okay with that? Because if they're not, then you've either got a charge of a higher price. Or consider if you want to do business with him at all uncounted guests. The same thing you need. Understand, Mr Client, that you've said 20 guests. If your numbers more than one or two people higher, we can handle a difference of one or two. If it's more than two more people, we gotta charge a premium. And here's why. And here's how much we charge you gotta lay it out to avoid the problem of losing some of your profitability. Okay, Now, let me also talk about something called sales mix. You may be willing to accept the lower profit clients because you're balanced out by higher profit clients, and it kind of evens out. So you're not gonna be too stringent about holding everybody to that? Maybe because it's somebody's wants to put on a massive party. Okay, you're willing to let the staff stay for an hour because all in all, a little more labor expense to get a job that big. It's OK. Okay. So is a particular client profitable? A friend of mine was telling me earlier this week that you know his euphemism. His way of gently letting these class down is to say, You know, I just don't think I could meet your needs. Some people will challenge you on that. What do you mean? You know, But you've gotta have some depth, professional way. If you've just concluded that it's not profitable enough or that they're too demanding to say, You know, I just can't meet your needs, which it was very hard for me to get to say eventually. But now I do say it. I don't like saying it like we do business with everybody, but I can't. Okay, so what? We covered waas profitability. Generally, we told you about the formula for profit margin. We talked about profitability for your industry. We talked about profitability for a particular client and coaching your client, coaching your clients. Any questions out there? I have a comment for the online audience. I just got back from Imaging USA And if you're a member of P. P. A. I know there's a lot of photographers out there. Uh, and since we're talking about benchmarking, they have a tool called Square One online on their website that gives you templates for, ah, home based studio and ah, brick and Mortar Studio as well. So I feel not to be really useful. Can you say that one more time? Just so we get it, it's on pp a dot com Professional Photographers of America. Okay, have ah benchmarking tool called square one square. What for those of you out there pp a square one great Renata. And when you're talking about profitability, the question is, how do you think about profitability when your business is service based IE Your cost is your own labor if you're a one person business and I think we have a lot of those in the room. Great question. Um, so how do you do it when your time is your asset? Okay, we describe that is professional service people. Well, one way to think about it is if you were working for somebody full time, take whatever that salary would be in divided by hours. And maybe that your album hourly rate. It's one way the other would be to talk to people who are in the same industry about what they're charged. I use myself as an example. I'm moving toward a model where I'm going to do one on one in person, in depth business consulting. Okay, How do you much do you charge for that? I mean, that's pretty. They I'm gonna be very specific about what I do. But there's a lot of people out there who are charging from here to here. So how do I price? Well, I've got to do my homework and I've got to basically set up a grid that says, Here's what I do. Here is what he does. Here is what he does. Here is what he does. And here's what they charge. And that's and I'll figure out how to price it that way. Good question. Thanks. Looks like we had another question, and I'm not sure this may have come in when we were going over. QuickBooks catered asked of trend if transactions or expenses or downloaded a new online baking expenses be entered manually to, and Renata followed you had that same question. But she said, in addition, should we enter journal entries every day as they happen? Or once a month? She was saying, It seems like it would be hard to do it once a month, but maybe too much to do every day. Great to great questions. So in the 1st 1 that downloaded most of these entities, like a bank, has worked with QuickBooks so that when it gets downloaded, it ends up in the right place. That is, if its credit card expenses, they're going to get put in expenses somewhere. Now, you may have to do some moving around, but it's not as if you have to enter every transaction from scratch. So the credit card expenses get loaded into expenses and you've got to move it around or your PayPal payments get loaded into revenue automatically, and they're sitting there in revenue. But you may have to move it around a little bit. Great. Uh um, what was the second question, um, entering journal entries and whether you should do it once a month. But today I would love it if everybody would do it once a week. I think every day is overkill. I know people who do it. I have a contractor who's very well organized. He does it every day. I wouldn't do it every day. I would do it once a week. Block out that time, cause then you could manage your time rather than trying to do it every day and kind of interrupting your day block out Friday morning, I'm gonna do all this and get it all done. Get it knocked out once a week. I would, though, reconcile your bank statement, and I'll do this in the cash section within five days of getting your statement. Don't let that slip because your bank statement is 1/3 party telling you about all your transactions, and you've got to make sure that your accounting records matched the bank. Eso. It's worth it to reconcile within five business days. Terrific, please, for May