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The monthly review

Revenue, gross profit, operating profit and cash as four answers to four different questions, compared month on month, in a five-step review that ends with one thing to change.

Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.

1. What you will learn

You will take a month's figures and say which of the four numbers — revenue, gross profit, operating profit or cash — answers each question an owner asks, work out how a change such as a rent rise moves them, compare a margin with last month's in percentage points, and run a five-step review that ends with one thing to change and a date for the next one.

2. What you already have

You can lay a month out as a profit and loss and forecast the account over the next few months. This lesson puts both in front of you once a month and asks what makes them useful: which number answers the question I am actually asking, how does this month compare with the last, and what is the one thing I will change before the next review?

3. Words this lesson uses

4. Four numbers, four questions

Revenue, profit and cash are three answers to three different questions, and a business can be strong on one and failing on another in the same month.

A month can show a profit and end with less money in the account than it started with. That is not an error in the arithmetic: it is a sale that has been made and not yet paid for.

Profit there is one word doing two jobs. Revenue minus the cost of the things sold is gross profit, which judges what you sell at the price you charge; minus the cost of being open too, it is operating profit, which judges the business. Cash is on neither rung.

5. The method, step by step, and how to check it

Close the records first. Every sale, payment, paid-out and owed amount for the month entered, the drawer cashed up, the bank statement matched. A review run on half-written records is a review of numbers that will change.

Work out the four numbers. Revenue from the sales; gross profit after the cost of what was sold; operating profit after the cost of being open; cash from the account. Add the two margins — gross and operating profit as percentages of revenue — because they can be compared across months of different sizes.

Put them beside last month's, and the same month last year if there is one. The direction matters more than the level. A gross margin that fell three points in a month is a question; one that has fallen three months running is a pattern.

Ask which number moved first. A change in what was sold or its price shows first in revenue; a change in buying costs in gross profit; a change in overheads in operating profit; a change in timing only in cash.

Name one thing to change, and write the date of the next review. One change is enough: the next review shows whether it worked.

Check the review by asking whether each number was used only for its own question, and whether the change chosen follows from the number that moved. A falling gross margin answered by cutting the rent, or a cash shortfall answered by a price rise, is a review that read the wrong line.

6. A month, read four ways

Northside Repairs, last month.

Four answers, none interchangeable: people bought 4000 dollars' worth; a repair is worth doing, since 2560 survived the parts; the month paid, by 960; Friday depends on the 310 alone. Then put 2560 beside last month's 2900 and name one thing to change — the half people leave off.

7. Choosing the one thing to change

The hardest step of the review is the fourth, because the numbers rarely point at one obvious action. A useful rule is to start from the number that moved the wrong way the most, measured in the margin rather than the dollars, and ask which lever reaches it.

Choose one lever, say what result would show it worked, and write both down. Ask the wholesaler for last year's price on mangoes; gross margin back above 22 percent next month. The next review then starts by checking that sentence, which is what turns a monthly half hour into a way of running the business rather than a way of worrying about it.

Resist changing several things at once. If three things change and the month improves, the owner cannot tell which one worked, and the next decision is a guess again.

8. Making the review a habit

A review is only useful if it happens every month, including the months that went well and the months the owner would rather not look at. A few practical arrangements make that much more likely.

Fix the day and the length. The first Monday of the month, thirty minutes, in the schedule like an appointment with a customer. A review with no fixed day drifts to when things calm down, which in a small business is never.

Use the same one-page layout every month. Four numbers and two margins down the left, this month, last month and the same month last year across the top, and three lines at the bottom: what moved, the one change, the test for next month. Filling in the same page makes the comparison automatic and the gaps obvious.

Keep the pages together. After six months the stack of pages is the business's own history, and it answers questions no single month can: which months are always slow, which changes worked, which margins drift when nobody is watching.

Review with someone, if you can. A partner, a friend in business or an accountant, even for ten minutes, asks the question the owner has stopped asking. Explaining a number out loud is often enough to notice that it does not make sense.

None of this needs software. A notebook page with the same headings every month, filled in from a record kept with five columns a day, is a complete system for a business of one — and it is the same system that larger firms run with more rows. What matters is not the tool but the rhythm: the same four numbers, on the same day, beside the same comparisons, ending in the same three lines written at the bottom.

9. In the world: a hair salon's quarterly pattern

A two-chair hair salon holds a review on the first Monday of every month. Over one quarter its four numbers read: revenue 11,200, 11,600, 12,100; gross margin (after products and the stylist paid per appointment) 58, 55 and 52 percent; operating profit 1,900, 1,680, 1,450; cash at month end 2,300, 2,900, 1,700.

Revenue is rising, which is what the owner used to look at, and she would have called it a good quarter. The review tells a different story. The gross margin has fallen six points in three months, and at 12,000 of revenue each point is 120 dollars a month. Operating profit has fallen by 450 despite higher takings. The cash dip in the third month is the annual insurance, already on her forecast, and not a concern.

Asking what moved gross margin, she finds that a supplier has raised color prices twice and that a new stylist, paid a higher share per appointment, is doing more of the bookings. She chooses one change: a color price rise of 8 dollars, with the test gross margin back above 56 percent next month. The stylist's terms are a bigger conversation, noted for the following review.

10. In the world: management accounts

Larger businesses produce management accounts every month — a profit and loss, a cash position and a few key ratios, set beside the previous month, the same month last year and the budget. They exist for the same reason as this review: the direction of the numbers, read regularly, shows a problem while it is still small.

11. Where this goes wrong

Reading revenue as a verdict. Takings are up, so we are doing better. Up on a discount, or on a line that loses money every sale: takings up and the business worse off.

Treating profit as one number. Collapse gross into operating and you can no longer tell a pricing problem from an overhead problem.

Reading cash as the score. The account is fuller because a customer finally paid a two-month-old invoice. Not this month's result, and it will not repeat.

Comparing dollars instead of margins. A bigger month has bigger costs; margins make months of different sizes comparable.

Reviewing only when worried. The month you most need a clean comparison is the month you least want to make one.

Reviewing without deciding. Four numbers and nothing named to change is a report: all of the work and none of the value.

A review is only for bad months. A good month reviewed shows what went right, and that is the part worth repeating on purpose.

12. Northside Repairs reads a month

1. Find the gross profit.

   $4000 - 1440 = 2560$

   A repair is worth doing at this price.

2. Find the operating profit.

   $2560 - 1600 = 960$

   The month paid.

3. Read the cash.

   $\text{account} = 310$

   Friday depends on this alone.

4. Compare gross profit with last month's.

   $2560 - 2900 = -340$

   Same revenue, less gross profit: parts cost more.

5. Name one thing to change.

   $\text{get a second quote on screens}$

   The lever that reaches gross profit.

13. A good month that cannot pay its bills

1. Find Neighborhood Kitchen's gross profit.

   $6000 - 3750 = 2250$

   The boxes are worth making.

2. Find the operating profit.

   $2250 - 1800 = 450$

   The business paid, barely.

3. Read the cash.

   $\text{account} = 120$

   Two office contracts pay at the end of the following month.

4. Find the gross and operating margins.

   $2250 \div 6000 = 37.5\%; \ 450 \div 6000 = 7.5\%$

   Margins to compare with next month.

5. Say which number is the problem.

   $\text{cash, not profit}$

   Product works and the month paid; Friday is the problem.

6. Name one thing to change.

   $\text{ask the offices for 14-day terms}$

   The decision follows the number that is bad.

14. A bad month that looks comfortable

1. Find Monica's gross profit this month.

   $5000 - 4000 = 1000$

   One dollar in five survived.

2. Find her gross margin.

   $1000 \div 5000 = 20\%$

   The measure to compare.

3. Find last month's gross margin: 1600 on takings of 5200.

   $1600 \div 5200 \approx 30.8\%$

   Last month kept far more of each dollar.

4. Find the change in points.

   $20 - 30.8 \approx -10.8$

   Nearly eleven points down.

5. Read the cash.

   $\text{account} = 1900, \text{ up on the month}$

   Up because she bought less stock in the last week.

6. Name what moved first.

   $\text{gross margin: buying or waste}$

   The cash rise was hiding a falling margin.

7. Name one thing to change and how to check it.

   $\text{new supplier quote; margin above } 25\% \text{ next month}$

   One lever, one test, one date.

15. Your turn: Bright Home Cleaning, revenue 2880, cost of what was sold 1530, cost of being open 900

1. Find the gross profit.

   $2880 - 1530 = 1350$

   A clean is worth doing at that price.

2. Find the operating profit.

   $1350 - 900 = 450$

   The business paid too.

3. Your turn: work this step out. Its working is at the end of the packet.

   Last month's operating profit was 600. Find the change.

16. Guided practice

Four things that happened to a business this month. Match each one to the number it moves first — the first of the four to come out different because of it.

17. Guided practice

Complete the worked solution: this month took $5500$ dollars; the things sold cost $2700$; being open cost $800$. Last month's operating profit was $400$. Review the month.

1. Find the gross profit.

   $5500 - 2700 =$ _g

   It judges what is sold at the price charged.

2. Find the operating profit.

   $(\text{gross}) - 800 =$ _p

   It judges the whole month.

3. Compare with last month.

   $(\text{operating}) - 400 =$ _d

   A figure on its own tells little; beside last month's it shows the direction.

4. Name one thing to change.

   $\text{one change, written down}$

   A review without a decision is a report.

5. Write the date of the next review.

   $\text{same day next month}$

   The date is what makes it a routine.

18. Guided practice

Bright Home Cleaning's month showed revenue $2880$, gross profit $1350$ and operating profit $450$ dollars. Next month the rent goes up by $150$ dollars and nothing else changes. What will operating profit be?

Answer:

19. Practice

An owner asks: Can I pay the supplier on Friday? Which of the four numbers answers it?

• Revenue
• Gross profit
• Operating profit
• Cash

20. Practice

Monica's takings were $6000$ dollars last month with a gross profit of $5400$, and $5000$ this month with a gross profit of $2500$. By how many percentage points did her gross margin change from last month to this month?

Answer:

21. Practice

Bright Home Cleaning has last month on one page: revenue $2880$ dollars, gross profit $1350$, operating profit $450$, and $447$ dollars sitting in the account this morning. Here are four questions the owner asks at the end of a month. Beside each one, name the number that answers it.

22. Somewhere new

A market gardener took $3357$ dollars at her stall this month. The seed, compost and trays in what she sold came to $1633$, and the pitch fee and the van came to $998$. There are $520$ dollars in her account on Friday. What was the month's operating profit, in dollars?

23. Lesson test

Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.

24. Test question

Neighborhood Kitchen has last month on one page: revenue $6000$ dollars, gross profit $2250$, operating profit $450$, and $219$ dollars sitting in the account this morning. Here are four questions the owner asks at the end of a month. Beside each one, name the number that answers it.

25. What you can do now

You can name the question each of the four numbers answers, say what a change moves first, and compare two months' margins. Tell someone how a month can show a profit and leave you unable to pay the supplier on Friday. Next: a budget set before the month, and the variances that show where the month went differently.

Working for the steps left to you

15. Your turn: Bright Home Cleaning, revenue 2880, cost of what was sold 1530, cost of being open 900, step 3