By Brad Martin, Nexstar Network Business Coach
In order for your income statement to be a valuable management tool, you must know how to correctly use it, and you must use it consistently.
What Nexstar Network Business Coaches See…
As a Nexstar Network business coach, I find that what often happens in that a general manager or owner doesn’t truly understand the importance and value of their income statement. General managers and owners who fall into this category are often overwhelmed by all of the different numbers. This leads to them spending more time doing other work that they understand and are good at performing. As a result, an opportunity to make good management decisions based on sound financial information is lost. Instead of managing by the numbers, they manage on assumptions and gut feelings, which are often inaccurate.
What General Managers and Owners Need To Understand…
In a sense, your income statement is THE KEY scorecard you have to help guide you in running a profitable business. It shoes your bottom line profit—how much your company gets to keep at the end of the day, before and after taxes. Net profit is the ultimate measure of an effective general manager or owners. If you are growing your business with a healthy net profit, you are succeeding in your role.
The Big 5…
In terms of your income statement then, you want to focus on five key items (at Nexstar, we call these “The Big 5”).
- Direct Labor (the wages and benefits we pay the people doing the work in the field)
- Material Expense (the net cost of the materials we sell to customers)
- Office / Overhead Salaries (the wages and benefits we pay the people who support the people in the field)
- Vehicle Expense (all expenses including lease/depreciation and interest, maintenance, repairs and fuel)
For successful contractors, The Big 5 together represent about 70% of sales. Focusing on these items will help make the income statement less overwhelming and a more effective tool for you as a manager. If you can manage these five expense categories and keep them in line, you will have a hard time NOT making money.