First, after last week’s Financially Fit Business on why people steal, some of you asked for procedures to keep the honest people honest. I wrote a book on it: The Ugly Truth about Cash which gives you many of the procedures to put in place. I also put some other procedures in 101 Dumb Financial Mistakes Business Owners Make.
Now onto Financially Fit Business.
When I did the research on our industry’s financial statements, I shockingly discovered that around 80% of all of the statements had inaccuracies. So, to try to combat this issue, the next Contractor Cents series will be on identifying the major inaccuracies. This week will be on P&L inaccuracies. Next week I’ll write about balance sheet inaccuracies.
Here are the major P&L inaccuracies that you can spot in less than a minute:
1. Negative Revenue
That’s right. Negative revenue. A bookkeeping company sent one of the Financially Fit Business software users (www.FinanciallyFit.Business) a P&L with -$249,000 in revenues for the month of June, 2024. There is no way that you would have paid your clients a quarter of a million dollars!
2. Negative Gross Profit
This means that you bought a part for $1 and sold it for less than a dollar. Not likely.
The only way gross profit is negative is for warranty work, callbacks or other non-revenue work that you do on behalf of your customers.
However, if you don’t have inventory on your balance sheet and purchase expensive equipment for work you are doing in subsequent months you’ve entered that purchase in cost of goods sold with no revenue to offset it. Then, you will have a negative gross profit. This is NOT accurate. The equipment should go into inventory until the month that you perform the work and invoice the customer.
3. Unusually High Rent, Utilities, or Missing Recurring Monthly Expenses
This is the sign of a bookkeeper who closed the month without all of the expenses in that month. You have to pay your rent every month. You have to pay the utility bills every month. These expenses should appear every month. There should not be a month with no expense and the subsequent month with double the expense. Your net operating profit is wrong!
4. Unusually High or Negative Overhead Expenses
Quickly go through the list of overhead expenses to see if there are any negative numbers or numbers that seen unusually high to you. Negative numbers might be possible if you got a refund on an overhead expense. However, ask questions and find out why the amounts are really high or negative.
In less than a minute you can see the most common P&L mistakes.
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