You’ve had a really good year so far, after the mess of the last few years. Your top-line revenue looks much better than expected. New business is up, returning customers are buying again, and your sales team is feeling great about the prospects for the balance of the year. There is only one problem: Net Income is much less than you would have expected, and you don’t know why. But the urgency created by the surge in revenue puts the question aside – it will work itself out as long as the sales success continues.

Not so fast… Maybe that’s exactly the time you need to stop and ask yourself: Am I missing something?

When there isn’t an easy and comfortable explanation, should you push past it and hope it all works out in the end? Alternatively, how should you pour over the mass of information in the accounting records to isolate the reasons income isn’t matching sales?

The answer could be the difference between a foundational year that lays the groundwork for years of outsized profits or the start of a ‘work harder just to keep even’ approach that sooner or later burns you out. This may be the perfect time to make that choice. 

Here’s my suggested method for isolating all that data into pockets that provide answers instead of just questions.

1. Ask your accounting team to put your P&L trial balance into a spreadsheet with 5 columns:

   1. Column 1 – actual amounts recorded to each account so far this year

   2. Column 2 – what you expected to see in that account at this point (obviously much easier when you’ve developed a budget or profit plan at the beginning of the year, but lacking that use your best estimate of what you expected to earn or spend)

   3. Column 3 – the difference between the two, the variance if you will

   4. Column 4 – Your part: enter here the question you want answered based on what’s in Column 3

2. Have your accounting team go back and research the most impactful answers to those questions.

   1. Have them ignore all variances that are less than 10% out of line with expectations. This is not a laundry list of small differences but the 1 or 2 reasons they see that account for most of each line item variance, whether positive or negative (because you want to know both, no?).

   2. Ask them to record their summarized responses in Column 5. 

3. Now, sit down with your team.

   1. This team should ideally be comprised of your accounting team and your key management team. They will often be able to shed light on aspects of the responses that are beyond the knowledge of your accounting team.

   2. Meeting together in the same room at the same time makes everyone instantly smarter. 

4. Finally, decide if any of that valuable information guides you to make any changes in how business is conducted for the balance of the year.

   1. You will either see an increase in net profit margins or a clear vision of the changes that need to be made for next year.

   2. Consider an even more formalized process for developing and implementing a profit plan ('budget') for the next fiscal year.

We’re using this technique with clients across the country today, and the results are reassuring, encouraging, and most importantly, informative.