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Four lines compared across two months, the movement in each, a change in gross profit split into volume and margin, the line a named cause explains, and a next check that could prove the cause wrong.
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.
You will set revenue, gross margin, cash and money owed side by side for two months, measure each movement, split a change in gross profit into volume and margin, name the line a cause explains, and end the review with a dated check that could prove the cause wrong.
You can read an income statement, a balance sheet and a cash forecast, and explain a month where profit and cash parted company. A monthly review uses a few lines of each, every month, in the same order.
| Term | What it means |
|---|---|
| Movement | This month's figure less last month's. |
| Percentage point | The unit a margin moves in: 65 to 60 percent is a fall of five points. |
| Volume and margin parts | A change in gross profit split into selling more or less, and earning more or less on each sale. |
| Cause | One sentence saying why a line moved. |
| Next check | A dated action that could prove the cause wrong. |
A review that looks at everything sees nothing. Four lines cover most of what goes wrong in a small business:
Corner Bean's April against March: revenue 11400, down 600 (5 percent); margin 60 percent, down 5 points; cash 600, down 800; owed by customers 1440, up 540.
Every line moved. The review's job is to find the one that explains the others. Alexa checks the receivables and finds the Town Hall canteen has not paid March's invoice: 540 that should be in the account is not, which is most of the fall in cash. That becomes the review's conclusion, in three parts:
If the money is in on the fifteenth, the cause was right and the month is explained. If not, the review has found a bigger problem, early.
Another way: table
Corner Bean, March and April.
| Line | March | April | Movement |
|---|---|---|---|
| Revenue | 12000 | 11400 | −600 |
| Gross margin | 65 percent | 60 percent | −5 points |
| Cash at the month end | 1400 | 600 | −800 |
| Owed by customers | 900 | 1440 | +540 |
The margin fall needs a second look next month; the receivables explain this one.
Another way: steps
Make the figures true first. A review built on a bank balance that has not been reconciled with the books reviews a mistake. Check off every payment and receipt on the statement against the cash book before anything else.
Set the months side by side and move each line. This month less last month, in dollars, except the margin, which moves in points. Put the revenue movement as a percentage too, because 600 dollars is a disaster for a stall and noise for a restaurant.
Split gross profit. When revenue and margin both moved, split the change in gross profit into its two parts, so the review knows which one cost more.
Name the line, the cause and the check. One of each. The line is the one the cause acts on first; the check is something that could prove the cause wrong, with a date.
To check the arithmetic: the movements, added to last month's figures, must give this month's; the volume and margin parts must add up to the whole change in gross profit; and the change in cash must be explainable by the bridge from the profit-to-cash lesson.
Gross profit is revenue times the margin, so it can fall because fewer sales were made, because each sale earned less, or both. The split separates them:
$$\Delta \text{gross profit} = \underbrace{\Delta \text{revenue} \times \text{old margin}}_{\text{volume}} + \underbrace{\text{new revenue} \times \Delta \text{margin}}_{\text{margin}}$$
At Corner Bean, gross profit fell from 7800 to 6840, by 960. The volume part is −600 × 0.65 = −390; the margin part is 11400 × −0.05 = −570. The two add to −960. So although revenue is the line everyone noticed, the margin cost the café more, and the next review's second question is why each coffee earns less than it did.
The split is the reason the review watches the margin in points and not just gross profit in dollars: a business can sell more every month and still watch its gross profit fall, if each sale is earning less.
A next check is only useful if it could come back with the wrong answer. Keep an eye on costs cannot: nothing is counted, nobody knows when to look, and no result would disprove anything. Put February's screen invoice beside March's and reprice screen replacements, then read the margin again next month can, and Dan will know within a month whether the supplier's rise was the reason his margin fell eight points.
The same test applies to the cause. Trade was slow explains every month and therefore none. The office block next door closed for refurbishment names something that can be checked by counting lunchtime customers for two weeks.
Every month moves a little. Before a movement is called a problem, set it against the business's own normal swing: the same month last year, and the range of the last six months. A café whose revenue moves five percent either way most months has learned nothing from a four percent fall in April; a fifteen percent fall is a signal. Seasonal businesses compare with the same month a year earlier, because December against November tells a gift shop only that it is Christmas.
The same goes for the margin. A café's margin moves a point or so as the mix of drinks and food shifts; a five-point fall in one month is beyond that, and asks for a cause. Keeping the last twelve months of the four lines on one sheet makes the normal swing visible at a glance, so the review spends its time on the movement that is outside it.
Two of the four lines are best read as a pair. When cash falls and what customers owe rises by a similar amount, the month's money has been earned and not collected: the cause is almost always a customer, and the check is a telephone call and a date. When cash falls and receivables do not move, the money has gone out rather than failed to come in, and the cause is a payment — a quarterly bill, an equipment purchase, a tax installment, the owner's drawings.
Receivables can also be turned into days, as the course did early on: what customers owe divided by credit sales a day. Corner Bean's catering customers owed 1440 in April on credit sales of about 2400 a month, or 80 a day — 18 days of sales, up from under 12 in March. Days are better than dollars for spotting a customer drifting later, because they do not rise just because the business is selling more.
When receivables fall and cash rises, earlier months' profit has come home. That is good news, but it is not trading news, and it should not be the reason the review decides the month went well.
A review that lives only in the owner's head is forgotten by the next month. The written version is short: the four lines with their movements, then three sentences — the line, the cause, the check with its date. Next month's review opens by reading last month's three sentences and asking whether the check was done and what it found. That habit is what turns a monthly look at the figures into control: each cause is either confirmed and acted on, or disproved and replaced, and nothing that mattered is quietly dropped because a busier month came along. Over a year the file of three-sentence reviews becomes the business's own record of what moves its numbers, and the owner learns which causes come back.
A family restaurant with sales of about 40,000 dollars a month holds its review on the first Monday of each month, and it is over in forty minutes because it always runs the same way. The bookkeeper brings the reconciled bank balance and a one-page sheet with the four lines for this month, last month and the same month last year.
One October, revenue was up 5 percent on September and 4 percent on the previous October — ordinary. But the gross margin had fallen from 68 to 64 percent. The split put the story plainly: the extra sales added about 1,300 dollars of gross profit at the old margin, and the four-point fall cost about 1,600. The restaurant had been busier and earned slightly less for it.
The cause proposed was the meat supplier's autumn price list. The check was specific: the chef would compare the September and October invoices for the six highest-selling dishes by Wednesday. The comparison found the meat prices had risen by about 8 percent, which accounted for roughly three of the four points; the fourth was waste from a new menu item prepared in batches that did not sell. The menu was repriced by a dollar on four dishes, the batch item was made to order, and November's margin was back at 67.
Without the split, the review would have celebrated the higher sales.
Accountants who work for small businesses often send a short monthly pack — a few key lines against last month and last year — and many businesses find that the value is not the pack but the conversation it forces: one line, one cause, one action.
A review is done when every number is copied. Copying is the start; it ends with a line, a cause and a check.
The biggest dollar movement is always the story. Cash fell 800 at Corner Bean, but the cause lives in the receivables.
A margin change is measured in percent of the old margin. Margins move in percentage points.
Revenue up means gross profit up. Not if the margin fell by more.
One bad month means something is wrong. A check tells you whether it was a cause or noise.
Set the four lines side by side.
$\text{revenue } 5000, \text{ margin } 70, \text{ owed } 1200 \text{ both months}$
Three lines did not move.
Find the movement in cash.
$-200 - 300 = -500$
The only line that moved.
Name the cause.
$\text{the quarter's polytunnel lease}$
A lumpy bill shows in cash first.
Check it against the lease.
$\text{quarterly lease} = 500$
The whole movement is explained.
Set the dated check.
$\text{balance a week before the next lease}$
End on a check with a date.
Find March's gross profit.
$12000 \times 0.65 = 7800$
Revenue times margin.
Find April's gross profit.
$11400 \times 0.60 = 6840$
Revenue times margin.
Find the change.
$6840 - 7800 = -960$
What the review has to explain.
Find the volume part.
$-600 \times 0.65 = -390$
Fewer sales at the old margin.
Find the margin part.
$11400 \times (-0.05) = -570$
Each sale earning less.
Check the parts add up.
$-390 - 570 = -960$
The margin cost more than the lost sales.
Find the movement in revenue.
$8800 - 8000 = 800$
Revenue rose.
Measure it as a percentage.
$800 \div 8000 \times 100 = 10$
A good month for sales.
Find the movement in the margin.
$52 - 60 = -8 \text{ points}$
Each repair earned less.
Find the volume part.
$800 \times 0.60 = 480$
More repairs at the old margin.
Find the margin part.
$8800 \times (-0.08) = -704$
Larger than the volume gain.
Name the line and the cause.
$\text{margin: the screen price rise not passed on}$
Gross profit fell 224 on higher sales.
Set the dated check.
$\text{reprice screens; read the margin next month}$
It could prove the cause wrong.
Find the movement in revenue.
$8550 - 9500 = -950$
This month less last month.
Measure it as a percentage.
$-950 \div 9500 \times 100 = -10$
Against last month's figure.
Name the line that explains it.
Two months at Corner Bean. Revenue went from $9500$ to $8550$ dollars; gross margin from $60$ to $61$ percent; cash at the month end from $2600$ to $2400$ dollars; money owed by customers from $700$ to $650$ dollars. Fill in each line's movement, this month less last month, with a minus sign for a fall.
| Movement | |
|---|---|
| Revenue, dollars | |
| Gross margin, percentage points | |
| Cash at the month end, dollars | |
| Owed by customers, dollars |
Complete the worked solution: a florist's revenue went from $10000$ dollars in May to $11900$ in June, and its gross margin from $66$ to $69$ percent. Measure the months.
Take May's revenue from June's.
$11900 - 10000 =$ d
The movement, in dollars.
Measure it against May.
$(\text{movement}) \div 10000 \times 100 =$ p
The movement as a percentage of where it started.
Find the movement in the margin.
$69 - 66 =$ m
In percentage points.
Find June's gross profit.
$11900 \times 69 \div 100 =$ q
Revenue times the margin as a fraction.
Name the line to explain first.
$\text{the larger surprise}$
Then find its cause and set a dated check.
Alexa's review of April at Corner Bean. Put her four steps in the order a review should run.
Number the steps in order (write the number in the box):
Two months at Corner Bean. Revenue went from $9500$ to $8550$ dollars; gross margin from $60$ to $61$ percent; cash at the month end from $2600$ to $2400$ dollars; money owed by customers from $700$ to $650$ dollars. The owner has found the reason: the office block next door closed for refurbishment. Which line should the review name as the one that explains the month?
Revenue at Fixit Mobile went from $8000$ dollars last month to $8800$ this month. By what percentage did it move? Write a fall with a minus sign.
Answer:
Two months at Fixit Mobile. Revenue went from $8000$ to $8800$ dollars; gross margin from $60$ to $52$ percent; cash at the month end from $800$ to $900$ dollars; money owed by customers from $1500$ to $1560$ dollars. Split the change in gross profit into the part from selling more or less and the part from the margin, in dollars, with a minus sign for a fall.
| Amount | |
|---|---|
| Gross profit last month | |
| Gross profit this month | |
| Part from volume | |
| Part from margin |
A hair salon's gross margin fell in June, and the owner suspects the new color supplier. Each color appointment uses $3$ tubes, the new supplier charges $3$ dollars more a tube, the salon did $130$ color appointments in June, and its revenue was $13000$ dollars. Fill in what the dearer color cost, in dollars and in percentage points of margin.
| Amount | |
|---|---|
| Tubes used in June | |
| Extra cost of the dearer color, dollars | |
| Margin points it explains | |
| Price rise a color appointment to restore it, dollars |
Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.
This month Fixit Mobile had revenue of $8800$ dollars at a gross margin of $52$ percent. What was its gross profit, in dollars?
Answer:
You can run a monthly review that ends in a line, a cause and a check. Tell someone why “keep an eye on costs” is not a check. Next: a money decision, and the one further figure it still needs.
17. Your turn: revenue from 9500 to 8550, margin 60 to 61 percent, step 3
$\text{revenue: count lunchtime customers for two weeks}$
The margin barely moved; fewer customers explains the month.