The point isn't to change prices or operations every time a report shows something interesting. It's to have enough information to recognize when an opportunity is worth investigating.
When we first bought our business, I found the whole monthly reporting process to be a bit overwhelming. Annoying even. Our bookkeeper would come in each week to enter expenses and help with payroll, eventually getting to the month-end reconciliations when she had time. She’d print off the income statement and balance sheet for me to review, but as long as we had enough money in the bank to make payroll, I was generally happy.
It took a few years before I had an AHA moment. I mean, even with my systems and data analysis background, I was just too busy trying to keep up with fighting fires daily and the apparent urgency that came from running a business. I remember looking at the income statement one day though (or one night at midnight more likely) and wondering why our food costs seemed so high. So I proceeded down the rabbit hole of comparing our numbers month-over-month, year-over-year, etc. — determined to find some answers. While our prices had increased a bit each year and sales were good, the cost of a few ingredients was killing us. It could have been chicken, avocados or kumquats for all I know! Okay, we didn’t use kumquats, fair enough. But it wasn’t something obvious like beef or french fries.
My chef hadn’t noticed — she was focused primarily on satisfying our customers. And of course, my distributor wasn’t likely to say anything if we didn’t ask outright. My bookkeeper was great, but she didn’t understand our business well enough to really notice what had changed from one month to the next. The onus was completely on me to dig in and find the culprit, then make decisions based on that. Use different ingredients, change the menu, get better costs, increase pricing, etc. I had lots of options once I knew the problem I was trying to solve.
To be fair, it wasn't my bookkeeper's job to manage food costs, or my chef's job to spend hours in the accounting system. But it was my job to understand the individual pieces and make sure the business was profitable.
What data do you have available?
These days, most businesses have access to far more information than we did back then. Accounting packages like Sage and QuickBooks have some really sophisticated reporting capabilities, and that's before you add in point-of-sale (POS) systems, online ordering, reservation platforms, payroll and scheduling software, and whatever other technology you're using.
But how much of it are you actually taking advantage of? Are you taking the time to go through the reports, understand what they’re trying to tell you, and then making effective decisions based on the data?
Let's start with the monthly income statement. Many business owners still rely on their bookkeeper or accountant to close the books and provide reports once the reconciliation process is complete. That might be two or three weeks into the following month, depending on how busy everyone is. By then, if your food costs were too high or your labour expenses were out of line, you've already spent several weeks operating without knowing there was a problem.
I'm not suggesting you should be making major decisions based on incomplete financial statements. There's a reason we reconcile accounts and make adjustments at month-end. But what information do you have access to in the meantime, and how much is too much when it comes to detailed analysis if you’re not a data geek like me?
You can probably log into your accounting system and see expenses as they're being entered, even if the month hasn't been finalized. Your POS system can tell you what you're selling, when you're selling it, and which items are most popular. If you're ordering products online from your distributors, you may have access to purchasing reports and price comparisons. And your payroll or scheduling system can probably tell you about your labour costs.
I suspect there are a lot of features that business owners already have at their fingertips that they either don't know about or simply haven't had time to explore.
What are you comparing your numbers to?
Something else to keep in mind is that at a monthly income statement can be misleading on its own. You need something to compare it to, and even then you need to understand what you're looking at.
For example, if your food costs are higher in March than they were in February, does that mean you have a problem? Maybe. But you could have purchased inventory in March that won't be sold until April, or incurred expenses for an event that hasn't happened yet. Depending on how those expenses are recorded, the timing can make a big difference to what your reports are telling you.
Sometimes a longer period helps smooth out some of those fluctuations and gives you a better picture of what's really happening – quarterly, for example, rather than monthly. And for seasonal businesses in particular, comparing the same quarter from one year to the next can be useful. Comparing July to February in a tourism business probably isn't going to tell you much, but comparing this summer to last summer definitely will.
Of course, it depends on you and your business. Monthly comparisons might be exactly what you need if you're trying to identify a cost increase before it gets out of hand. The important thing is to understand what the numbers represent and not jump to conclusions based on one report.
And when something looks a little odd, take the time to figure out why!
Let's say your income statement shows that office supplies have increased by $3,000 this month. That's a pretty big jump, depending on the size of your business. But what does it actually mean? Did someone order a year's worth of supplies? Was an equipment purchase recorded in the wrong account? Or has spending gradually increased without anyone noticing?
Most accounting systems allow you to drill into the expense category and see exactly which transactions make up the total. It might take five minutes to figure out what happened. Or it might lead to a bigger discussion about purchasing decisions and who's approving expenses.
I pay special attention to GL accounts labelled Miscellaneous Expenses. What gets lumped into those accounts, and how often does anyone look at the details? It's easy to assume that if the bookkeeper enters everything correctly, then the financial statements must be telling you everything you need to know. But accurate bookkeeping and understanding what's happening in your business are two different things.
Finding opportunities in the numbers
Of course, it's not just about catching problems, and it’s not just about your accounting software. Sometimes the data can help you identify opportunities you might otherwise miss.
Take something as simple as beer pricing. Lucky Beer might not be your personal favourite, but if it's outselling your local craft beers two to one, that's worth knowing. Let's say you're selling 500 Lucky’s a week. What would happen if you increased the price by just 25 cents?
Assuming you didn't lose any sales, that small increase would generate an additional $6,500 a year in revenue, with most of it going straight to your bottom line. Not a fortune, but not bad for a relatively small adjustment that your customers may not even notice.
Now think about how many products you're selling, and how many similar opportunities exist. Maybe there are items you could price a little differently, products you should be promoting more, or menu items that are popular but aren't actually contributing much in terms of profit when you consider their costs.
If you're running a hotel, resort or tourism business, the same thinking applies. Your booking reports might show that certain days or times consistently underperform. Could you offer something different during those periods, adjust your staffing, or develop packages that encourage customers to book when you have capacity available?
The point isn't to change prices or operations every time a report shows something interesting. It's to have enough information to recognize when an opportunity is worth investigating.
Going back to my experience with food costs, there are ways to keep an eye on those gradual price increases without spending hours in your accounting system. Some restaurant management software allows you to enter recipes and track ingredient costs as supplier invoices come in. But even a simple spreadsheet that monitors the costs of your most important ingredients could do the trick.
If you're ordering online, have a look at what reports are available through your supplier’s systems. Can you compare what you paid for a product three months ago to what you're paying today? Can you see whether you're buying more or less of something? Perhaps your sales rep can help you find alternative products or better purchasing options.
Sometimes it doesn't take much information to make a worthwhile change.
When is enough information enough?
On the flip side, just because we can collect information doesn't necessarily mean we should.
It's pretty easy to get carried away with systems, reports and processes, particularly when new technology makes it possible to track almost everything. But collecting and analyzing data takes time, and time costs money.
Inventory counts are a good example. Let's say you introduce a new procedure requiring staff to complete detailed inventory counts every day. If you have problems with waste, theft or unexplained inventory discrepancies, this might be exactly what you need.
But what if you're asking employees to spend another 30 minutes every day counting products and entering information into a system, and nobody has time to look at the reports? Or you look at them, but don't actually make any decisions based on what you're seeing?
You've just added labour costs and another task for your employees, without really improving anything. In fact, if they go to the extra effort and it seems all for naught, it’s likely to frustrate them more than anything.
We sometimes get caught up in the idea that more processes and better reporting automatically means we're managing our businesses more effectively. But that’s not always the case. If you're going to ask staff to collect data, you should have a pretty good idea of what you want to learn and what you're going to do with it. There's value in employees knowing you're paying attention, but there still needs to be some genuine follow-through.
There are times when detailed daily reporting is absolutely necessary. There are also times when a quick weekly review of a few KPIs (key performance indicators) is probably enough. It depends on the business, what you're trying to accomplish and how much time and money you're willing to invest in the process.
Personally, I'd rather have a handful of reports that someone actually understands and uses than dozens of reports being generated every day that nobody reads.
So who's paying attention?
I realize that not every business owner has the time or inclination to log into QuickBooks and start digging through expense accounts. I get it. There are plenty of other things that need attention, and sometimes it's a much better use of your time to have someone else doing that work.
But someone should be paying attention to the numbers, and not just making sure they're entered correctly. It might be your general manager, controller, bookkeeper or an outside advisor. Whoever it is needs to understand enough about how your business operates to recognize when something doesn't make sense, and to bring it to your attention.
At the end of the day, running a profitable business should be relatively straightforward. Make a good product, price it fairly, sell it to a demanding audience, manage your costs and make a profit. Easy, right? Of course, anyone who's owned a business knows there's a lot more involved than that.
But I do wonder if we spend a lot of time and money on technology and systems to collect all kinds of information, only to get so busy running our business that we don't take advantage of what we've already paid for.
I'm not convinced we necessarily need more reports, more complicated software or more procedures. Maybe we just need to get a little better at understanding the information we already have, and using it to make decisions that help our businesses perform better.