34 By Ron Sturgeon How to Understand Your Profit and Loss Statement How to do it There are usually not more than a half dozen lines that you can control to a large degree. You should review those, comparing the current month, the prior month, and the same month last year. So, if you are reviewing March, you will be comparing the numbers to February, and to March in the prior year. If you prepare an annual budget, which you should, you would also be comparing to that number. The numbers needing the most attention, in order of importance, are likely to be these: The profit-and-loss statement need- n’t been intimidating. In fact, there aren’t more than a half dozen numbers that deserve your maximum attention. Always review it in the context of the prior twelve months so that you are see- ing the same month last year and every month up to the current month. Although all columns are needed, the most important places to compare are last year for the same month and the PL for the previous month. Ÿ Sales - Did you hit the sales you wanted? How did they compare to last month and last year? You will want to consider the number of work- ing days in the month. When you sell, say, $20,000 per day, a few days short or over can be material to results. If you didn’t hit the goals, why not? The first culprit in many cases is purchasing; if you didn’t buy enough product, you can’t have enough sales. In the auto-recycling Most owners don’t like finan- cial statements, so they don’t look at them. In today’s fast world though, where it’s harder than ever to make a buck, it’s critical that you spend some time on the financial state- ment. As I discussed in an earlier article in this series about using your flashlight, you should be getting the financial state- ment by the 10th of the month in order to review and work on improving your bottom line during the month you are now in. business, we don't buy cars; we buy sales, as my good friend Jim Counts says. Read my earlier article about purchasing, cost of goods, and inventory turns. The next place to look, of course, is sales staff. In most cases, I find yards selling less than $25,000 per month times the total number of employees aren’t profit- able; above $30,000 per month per employee, the yards become quite profitable, above 10% net profit. Ÿ Costs of Goods - Most of you treat your purchases as cost of goods sold (COGS). This paragraph is for you. You simply must understand what you need to spend on vehicles to hit the sales number you want based on previous data. If you don’t buy enough, you won’t hit the sales goals. Also consider your year-to- date number, as buying does go up and down, but your purchases over 3-4 months must be at the historical percentage to MAINTAIN sales. If you want to increase sales, you must buy more. To do that, you will have profits and or increased capital or lending. I am always amazed at the yards that don’t seem to understand that freight costs should be included with vehicle costs for this analysis. I see yards stop their buying out of town because the freight costs are too high, with no regard for what the cost of goods percentage is for the cars themselves. Why do you care if the freight costs from Seattle are $1,000, and the car costs $1,500 with a 33% cost of goods sold percent- age? (Meaning it will produce $4,500 in sales) so the car actually cost $2,500, and produces sales of Ÿ Cost of Goods Percentage Method - If you use a percentage method, based on actual history and algorithms, which is the best and most accurate method, then you must dig a little more to determine actual pur- chases, but its key to understanding your sales performance. Ÿ Tow trucks - As an aside, I don’t know anyone who still owns a tow truck and tows their own cars in, except in tiny rural markets. Ÿ Labor expenses - Compare to prior periods, to understand as a percentage of sales and total dollars. Months with 5 payroll periods instead of 4 will, of course, be higher. Also, how is it trending year to date, especially if you are working on reducing it? In the auto recycling business, I seldom see labor costs much below 20% of sales, but anything over 40% is a danger sign. $4,500, or a total COGS of 55%. But they will pay $2,700 for the same car locally, and $150 to haul it, for a 63% COGS. There are other advantages to buying out of your market because you are likely to see more cars and to be able to buy the ones you need the most. Ÿ Other expenses - Next review expense items that you have control over, those that are above 3% of sales; there’s likely no need to look at depre- ciation, utilities, or rents, for instance, so this category of items to review is pretty small. It might include advertis- ing or hauling. Auction buyer fees and transportation should generally be included with purchases for analysis, because you can’t usually control them. Looking carefully at these larger items will give you control over your bot- tom line, while only reviewing a very few numbers. “The profit-and-loss statement needn’t been intimidating. In fact, there aren’t more than a half dozen numbers that deserve your maximum attention.”