Tom Grandy: Determine how your profit will be spent ahead of time
Part 1 of a two-part series.
Nearly all dollars a company spends have been predetermined…except profit. Labor and materials dollars are predetermined based on the job. All overhead costs have been directed where to go. Specific dollars have been pre-allocated for rent, utilities, insurance, etc. However, profit tends to be the redheaded stepchild. It sits around until somebody decides to buy an extra tool or perhaps the owner takes a weekend trip with the family. The profit literally gets frittered away until it’s all gone. That needs to change! As Dave Ramsey says, “We need to tell every dollar how it will be spent, ahead of time.”
This will be a two-part article. Part I will deal with determining what “real” profit the company has from a cash flow standpoint. The second article will deal specifically with what percentage of the “real” profit should be allocated for what. Profit from an accounting standpoint is far different than the “real” profit viewed from a cash flow perspective. Below is a simplified P/L statement from an accounting perspective.