updated August, 2024
If you’re in business to make a profit, and all businesses should be making a profit, then you’ll want to know how to run firm profitability reports in BQE CORE. Many architecture and engineer firm owners gauge profits simply by looking at cash in the bank. As long as there's money in there, they don’t worry. Of course, this is a terrible way to run a business, and doesn't give you the insights you need to make forward looking decisions or investments.
There are a few reports that you should get in the habit of looking at regularly in order to analyze and maximize profitability in your firm. Typcailly, firm owners like you should make an appointment on your calendar every week or month and set aside the time to review these reports. You may also create a small team to go over the reports together and then discuss the data and utilize it to make business decisions.
Profitability Reports: It’s an Accrual World
It’s important to look at your reports on an accrual basis. Accrual basis accounting is a method of recording income and expenses when they are earned or incurred, rather than when payments are received or made. Meaning, when you create an invoice that revenue will show up on your accrual P&L report. This means it shows your firm's finances closer to when the work is done, and can be predictive of future cashflow.
A cash basis report is generally only useful for filing tax returns, and you should definitely no run your business using this reporting method. It leaves too much out of the picture and is a reflection of the work that was done months earlier. It is backwards looking and doesn't help you project forward. It ignores your receivables and payables, which means a good chunk of your cash flow isn't considered.
Going forward, look at accrual based financial reports to analyze your firm's performance and look at trends over time.
Profit and Loss Comparisons - Accrual Basis
Firm owners should be looking at Profit and Loss reports (P&L) on a regular basis. It’s extremely helpful if you have some kind of a benchmark in which to compare the reports you review. One way of doing this is to compare last year with this year - either the full calendar year, or comparing the past 12 months with the previous 12 months. This kind of side by side comparison can often highlight anomalies. Having a benchmark, or historical data to compare to, helps you identify and correct bookkeeping errors. Assuming any anomalies you find aren't based on human error, the analysis provides powerful insights as to what happened - where new revenue or expenses came from.
If your firm's expenses went way up from last year to this year while revenues were the same, this is a problem. You’ll need to understand what happened and why so you can correct the issue. Analyzing the comparative report on a regular basis will help you find and address these issues promptly, before they become cash flow issues.
On the other hand, if revenues went way up while costs were relatively flat, then you'll want to make sure you understand how you accomplished that. If you can identify the cause then you can hopefully develop a process to maximize it and sustain the increased profitability on a continuing basis.
In my consulting work we actually looked at firm's P&L statements on a quarterly basis.Typically we would compare the previous 8 quarters to see how the financial picture was changing and looking for trend lines for revenue, expenses, and profit.
This allowed us to have a more fine grained view of the firm's financial picture and also track trends over time. By seeing at least two years worth of quarterly data we could also see patterns in terms of seasonal change in financial metrics. We could then use these patterns to make predictions.
For example, if we are seeing that Q4 revenue tends to be low (probably due to holidays and vacations) we can predict that this will be the case in future years. Firms can then plan for lower revenue in the next fourth quarter, perhaps by building up their savings from the more profitable quarters in the year.
Monthly Profit and Loss Reports on an Accrual Basis
The next thing you should look at regularly in order to analyze and increase profitability in your firm is the monthly profit and loss report. Firm owners should have this report auto generated and emailed to the firm leadership team each month. It should be a regular part of your administrative cadence.
This allows you to examine trends and make sure that your data is normalized.
For example, if you pay the same amount of rent every month, that amount should show up on the rent line item with 100% consistency. What you may find when you look at a report like this is that you have some months with twice the amount and others missing the rent item. If this happens, it’s because the rent expense is coded as the payments clear the bank account. This is a common error. To correct this, enter bills on the first of each month (automate them) and then apply the payments to the bills. This way you have your data normalized.
Looking at monthly reports allows you to fix small bookkeeping mistakes as they happen to give you a clearer, more accurate picture of your firm's revenue and expenses. This is important so that you can analyze the monthly profit and loss properly.
The P&L shows you how much you earned and what it actually cost you to run your business each month. Every firm owner should know off the top of their head what their monthly expense number is. If you don't know yours, go open your accounting software, run your P&L report for the past 12 months and calculate the average monthly expense. This should give you a clear revenue target you need to exceed in order to remain profitable.
Now you can analyze trends to see where you did well and where you did poorly. Build a report that shows you your Monthly P&L for the past 12 months, so you can track changes over time. Figure out where both the problems and successes came from in order to respectively avoid or replicate them in the future.
You might see that an increased advertising expense one month consistently leads to a bump in revenues a month or two later. This is a good sign that something you did worked well. Armed with that data you can justify increasing your advertising budget knowing it will have a positive return on investment.
The goal is to identify opportunities, learn from them, and make changes to your budget and investments.
Profit and Loss Accrual by Project
Now that you are analyzing the firm profitability reports mentioned above on a regular basis to give a clear picture of your firm's overall finances, it’s time to dig deeper into the source. Project level accounting is important to review on a regular basis so projects don't slip off budget.
If each project’s profitability is managed well, then your firm profits will take care of themselves. Reviewing accrual based profit and loss reports by project will help you manage your firm on a more granular level. You can see which projects were not profitable, or not as profitable, and start digging into those.
This of course assumes that your overhead is not out of control, but the prior two analyses should shake that out, if it is. Plus, focusing on increasing revenue and profitability by project is the first step in running a successful firm. Expenses become a big concern when you don't have the revenue to cover them, so focus on keeping each project on budget before worrying about cutting expenses.
As you are analyzing your projects, you should perform the same two analyses: Which ones did well, and why? Which ones did poorly, and why?
This is also a report that you should make available to your team. You should want your Project Managers, project architect and engineers, and even your production staff to know where the project lies and whether they are on budget. Arming your team with data will allow them to better manage their time and make better decisions to keep the projects on track.
Transparency is a powerful tool that will keep your employees engaged. Readily share project financial reports and be clear about what the fees are, what the budget is, and what the schedule is. Empower your project teams to make decisions to manage time and tasks with the goal of making each project more profitable.
Profitability Reports: Maximize the Good and Minimize the Bad
The above reports should give you a very well-rounded look at how to analyze and maximize your firm profitability. The key is the frequency with which you look at them. Look at them once and it can be insightful, but useless in the bigger picture. The more regularly you look at these reports and perform your analysis, the more readily you will pick up on anomalies. This will heighten the impact of the exercise, and thus your profitability.
For firm-wide P&L reports, it is recommended to review them monthly, quarterly and annually, and compare to past performance over the same timespan. For project based reports, it is probably better to review those weekly, or at least have the Project Manager review and share with their team weekly. To effectively manage a project you need to have a clear picture of the overall budget and be nimble enough to adjust resources to keep projects on track.
Maximizing Your Profitability Reports with BQE CORE
When it comes to creating and reviewing reports, it’s not always easy. Especially if you’re using spreadsheets or outdated software. How can you expect to keep track of how your profits are performing when you’re spending so much time doing everything by hand? Manual entry can lead to errors and omissions. If creating the reports takes too much time the data will be out of date by the time you are able to review it. It is highly recommended to implement firm management software that can give you live reports with accurate data at your fingertips at any time.
To get deep insight into each project’s profitability level and create reports quickly and correctly, you need an all-in-one software like BQE CORE. CORE helps you see the status of your firm's finances and your projects in real-time so you always know how they’re performing and how you need to act accordingly. Features also include time and expense tracking, project management, accounting, billing, and more.
Try a free demo today to see how BQE CORE can help you analyze and maximize your profits.
