An excerpt from Parthiv Shah's upcoming book on Fiscal Fitness, available soon!
In 1992, I went to Bentley University for my MBA. I took Accounting I, Accounting II, Finance I, and Finance II. I learned a lot about finance but the one thing that we barely spent any time on was job costing. Most colleges only tell you that the sole purpose of accounting is to keep track of how much money you need to collect from people and how much money you have paid to those you owe. While that is important, there are other key ideas when it comes to tracking finances.Most people who earn under $100,000 a year in revenue will take their bank statements and a bunch of spreadsheets in order to calculate their profits/losses. They would then go to their accountant with twelve months of bank statements and say, “here, tell me how much money I made and file my taxes please.” Regardless of the method, every business will go to an accountant and say here are my financials from the last twelve months, please prepare my tax returns and tell me how much I have to pay to Uncle Sam.
That typically happens between December and April. But, your accountant is swamped so what does he/she do? They file for an extension. Now it is September and the accountant calls you saying she is putting your paperwork together but needs to know what this $1,350 check made out to company X was for. You’re sitting there trying to rack your brain because that was sixteen months ago. Eventually, you guess. That backward guessing is how most people keep running their life and business.
Hopefully they grow out of that guessing nonsense but when they do, they will need a bookkeeper. The bookkeeper is going to do the data entry once a month. Unlike your accountant, who is more than a year behind you, your bookkeeper is only a month behind you. Everyone in that entire ecosystem -- the CPA, the bookkeeper, the accountant -- they all revolve around the idea of making sure you pay enough taxes so you don’t go to jail.
None of them take into consideration the money you need to run your business or how much it costs to pay all of your employees. Most people like to see their payday during the project but a lot of people do not know how much they spent on the project until they are done working.
I want to ask the question: what is a millionaire? Is a millionaire someone who makes a million or someone who has a million? If you are unsure, the answer is someone who has a million. You have to be able to make a million dollars and NOT spend it. In order to have a million, you need to have made a few dollars, spent a few dollars, and saved a million dollars. Project P&L will help you keep track of your journey towards becoming a millionaire.
What should be your financial model? Do you calculate revenue minus expenses in order to determine profit? Or do you use revenue minus profit in order to determine the expenses which you later tell the rest of your ecosystem to balance their budget from the money that you put on the table. Many business owners pay attention to cash but they don’t pay attention to their their fiscal fitness. Running a business with the latter method is a dangerous proposition as it is like eating the infamous donut from the earlier chapter.
You work hard to earn the revenue and you work hard to manage the expenses, my advice to you is to do more with your numbers than just keeping track of them. Take these tools and keep track of your numbers. Do not let your company suffer for something as simple as keeping track of some numbers, implement P&L sheets.