His finances PROVE you need to know your numbers!

Hey everyone, my name is Mike Andes. I wrote this book. You might want to check it out. But today I am not an author. I am Dr. Diagnosis and we're digging into a pool company that on paper seems to be making money.

I think I bought 10 pools for 20 grand. So.

10 pools, 20 grand.

It's pretty bad. I'm not where I need to be, you know.

But we're gonna look through its actual real profit and loss statement from last year and see if we can't determine what the problem is or, or how it can be improved or are these numbers even real?

Some customers think, you know, what are we paying for? You know, you're only here for 15 minutes.

This is from CO Crew Pools and I actually went there in person and helped turn around the business. But today let's look at just the profit and loss statement and see if there's anything we can learn. What's really interesting of this profit and loss statement, again, the first thing I'm looking for is how big are we? We're doing $160,000 in annual revenue. Now if we look at the bottom line, we're doing $52,000 of profit. Now if I take 52 divided by 160, we're looking at somewhere in the neighborhood of about a 30% profit margin. Alright, not bad. And what's crazy is I actually think he's making 30% profit margin. He's doing some of the labor himself and he's been growing the business pretty successfully. The one thing that is hidden on a profit and loss statement is the fact that if you go out and acquire and you make acquisitions in your business, it's not to show up on the P and L as an expense. Usually that's going to show up on your balance sheet. When you're buying anything as an asset, you're not going to usually see it on a P and L. For example, if I go out and buy a truck, I am not going to put that $40,000 expense on my P and L. I'm going to usually do that in terms of amortization or, sorry, depreciation over the course of five or ten years, whatever you worked out with your CPA that makes sense for your business. So depreciation and amortization do not show up on a profit and loss statement. So assuming that it is making about 30% profit margin, I want to go over today some of the hygiene that Dr. Diagnosis recommends when it comes to your profit and loss statement. I don't have an issue with the profit and loss statement in terms of the profit, like let's go 30%. I'm a happy man. However, this is what I, this is a pet peeve of doctor diagnosis. Look at how low some of these numbers are in terms of your chart of accounts. So when you look at QuickBooks, you're going to have something called chart of accounts. Think of it. If you don't know what chart of accounts is as categories, every single one of these items on a P and L is a chart of accounts. And you have to create these as either income or expenses. There's other categories, but those are the main two because we have our income at the top line, all our expenses, and we have our bottom line at the very end of the P and L. Now my pet peeve when it comes to chart of accounts is having way too many categories. But there's also a time you have not enough categories. And I think co crew pools is a great balance of having way too many in some areas and not enough in others. Let me explain. Why do we have unapplied cash payment income if we're going to have a zero on the P and L? Get rid of the chart of account for an entire year. You didn't use that chart of account or that category. Okay, we also, if I look at expenses under advertising and marketing, I have social media as a category and I also have website ads. Okay? So why would I not just combine these and make it the fact that this is literally less than 1% of this. I just make this one chart of account. So this could be combined. All right, just call it social media, online ads for your website, whatever you want to call it, just combine them then same thing down here below. We got $27, which is probably one expense in the entire year. The reason I'm so into this hygiene is as the business scales, if you start creating an account or a chart of account or a category on your P and L for every single little thing in your business, all of a sudden this turns into a five page document. When you're doing a million dollars. I don't want to categorize every little expense in a different chart of account. This starts to become so long and so complicated and so broken up into different categories, it actually becomes useless. And if it's useless and I'm not going to actually be able to get any information from this, it is worthless. And so $27, $217, $55, all of these things could be combined. We have training for $250. You could just Put all this under education.

And combine all this stuff together. Training, memberships and subscriptions, continuing educations, etc. The bank fees and service fees probably should not be under the general business expenses. It should probably be more towards the bank fees at the very bottom. Other expenses, that's another aside. This is just hygiene. This is not like, hey, the business is safe, the business is doing okay. But when I come to a business that is growing quickly and is profitable, the next step of business is how do I actually make sure I optimize my metrics so I can actually make good decisions in the business. And if you watch the full turnaround, you'll see there's a lot of confusion around what he should be doing, Joe should be doing in the business as the owner and what his focus should be. It's in part cause his metrics are all over the place. All of these tiny little metrics of chart of accounts, every single ones I'm highlighting right here are under 1% of revenue. And so what I would be recommending is how do we combine these things? For example, do I need entertainment with clients, meals with clients, and travel meals, or can I just put it all in her meals and entertainment? All right, these are categories that are so bloated in terms of number of expense items. And I'm not concerned now because I can fit on one page, two pages, let's go. But if this business is actually going to go to a million dollars, all of a sudden this P and L will become five pages long, and it will become absolutely worth this to the owner. When it comes to actually figuring out where the money is going in the business, then what's crazy is when I look at the back page here and I look at the supplies and materials, which makes up about half, more than half of the expenses, more than half of the revenue is going to this one line Item, which is $83,000 going to supplies and materials. So if I was to break this down by percentage, and you can do this in QuickBooks on your profit and loss statement, instead of just having a number here, you can have what percentage of your revenue is going towards this. And if we look at $150,000, $160,000 in revenue, and 83 of that's going out to supplies materials, that would mean that about 52 to 55% of of all his revenue is going to supplies and materials. This tells me the opposite is true. Now over here, he had way too many chart of accounts, way too many categories, and now I'm just dying I'm just dying to know where the supplies and materials are going. Like, is this chemicals? So this is a pool company, right? Something. Okay, probably some chemicals, probably not 50% of your expenses. So my guess here, without confirming this yet with the owner, is that this is actually hiding labor. I believe that he's paying people under the table or to subcontractors and he's putting under supplies and materials. I would like to see that broken out because even I actually believe his profit is around 30% based upon talking to him. I think he's actually running that profit margin business. But 52% of your revenue going out the door to just one very, very oblivious, kind of like nebulous gray supplies and materials. I want to see that broken down. Here's a rule of thumb for you. If any expense line item on your P and L is making up less than 1%, combine it. So combine it with other chart of accounts. If it's making up more than 25%, I want to break it down. Okay? So if you're throwing all of your wages into one category and it's making up 50, 60% of your revenue is going out the door to wages, I would like to see that broken down as much as possible. For example, how much of that is going to payroll taxes? How much of that is going to workers compensation? How much of that is going to admin. Wages versus field labor. So in general, to get a really good diagnosis and a bill of health, I like to see categorization that is combined when necessary. That is a whole bunch of random little like $9.09 for vehicle wash and road services. Why in the world do we have an entire expense item on the chart of accounts for just that one thing? Combine it with something like vehicle repairs and maintenance. Just combine it with this other one that's also less than 1%. I could just categorize all this as vehicle expenses and combine most of these things together. So doctor Diagnosis likes to keep his bill of health nice and clean. And, and to do that, I'm going to combine any chart of accounts that make up less than 1% of my revenue. If you want to have subcategories, great, you can do that inside of QuickBooks. But I want to be able to at a glance, be able to get all the financial data for my business. And as this business scales, if they don't do this and they scale to a million dollars, this P and L will become five pages long. And a five page P and L for a small business owner means absolutely nothing. If you like this breakdown. And you'd like to see the full turnaround of Code crew pools, watch this video right here.