by TDavid of http://www.scriptschool.com/

Do you do a weekly, monthly, and/or quarterly P & L with your web business?

Once upon a time I was a general manager for a large buffet chain. The store I worked for required weekly accounting periods every Wednesday night. I would sit down and figure out how much money the restaurant made manually using this long gray book. This was before doing the Profit and Loss (P & L) the computer way was acceptable to the corporation. I had a bunch of invoices, a #2 pencil, a calculator, this wide, almost daunting, gray book and my brain. Well sometimes it didn’t seem like I had my brain at midnight after spending 14 hours working the restaurant and then sitting down to try and work out the P&L. Anybody who has ever managed a restaurant knows exactly what I’m talking about.

The restaurant averaged over 11,000 customers per week. Our average ticket price was approximately $6 so you can do the quick math as to roughly how much money was coming in on a weekly basis. This is one of the first part of the profit and loss statement really, figuring out what is coming in, or in the case of inventory — what is left over unsold.

Now let’s figure out what’s coming in from our web business.

* Commission income from affiliate programs.
* advertising – money you receive specifically for selling ad space on your sites.
* merchandise sales – hard goods or digital goods that you distribute and receive money for.
* services – providing a service like design, tech support, domain sales/service, member renewals for a paysite, etc., that would go here.
* stock/inventory on hand* – this is the total value of any hard or digital goods on your premises that aren’t yet sold/used. This would also include items that have limited usage; IE. If you have a content CD that you can use for 5 domains, once you’ve used the content on 5 domains this can be said to be “used” and should be removed from the inventory list.
* other – anything I’m not thinking of

* while stock on hand might not seem like “income” per se, it does hold value and the value that changes from period to period has special meaning in a P & L statement. We’ll get to this in a minute.

For those not familiar with “gross” and “net” the sum of all the above would be the gross income from the web business. Now let’s look at the things that take away from this gross income. It is odd that it is called gross, because the gross thing is the amount of money you end up taking away form this gross figure. I used to wish on Wednesday nights at the restaurant that I could go home about this point where I had the total figure in excess of 100k. When figuring out the loss column, if you will, you need to do projections as well. Let’s say that you have a monthly phone bill relating to your web business of $100. You’d then calculate 25 per week and adjust the number up or down based on the actual invoices (er, bills) as you receive them.

Avoid fudging your projections and the “feel good” factor I have to pause here and talk about projections for a moment because I enjoy a good story, especially a nonfiction one that is relevant. There was this manager who I took over for in Portland, Oregon. He did the P & L statement for months before his projections started haunting him. His problem started with saying the inventory/stock on hand was a couple hundred dollars more than what we actually had.

The problem stemmed from when he over ordered (overspent) because he didn’t know how to order food (he’d order crazy amounts of items that took a long time to be consumed) It became harder and harder as time went on to cover up the couple hundred he “fudged” on each week. He felt good because the bottom line number made him “look good” in corporate eyes. Unfortunately for him, when the bosses stopped by and did a random inventory and realized he was $4500 out of alignment, his demons came back for dinner.

This is how some business wizards (apply sarcasm here) play with numbers so that they can “look good”. The problem with this strategy is sooner or later the numbers catch up with them. So “fudging” the projections can have a very disappointing outcome. Use realistic projections.

Fudge on the side of too much, not too little. Webmasters don’t really have a boss except themselves and their bank accounts.

Now let’s look at those expenses:

* Expenses – the money you wish you didn’t have to spend, but do! Travel & Lodging – are you going to webmaster shows? How many? This would be airfare, hotel expenses, etc.
* Meals & Entertainment – while you are at the webmaster shows especially, how much are you spending on “business” related meals and events/functions that you go with clients or network with associates at. Save those receipts, this stuff really adds up and is a projection number.
* Supplies – papers, pens, pencils, computer supplies (printer toner, ink cartridges, drum units), notebooks, CDs, disks, etc. Consumable products usually.
* Education – books, online and off-line courses, things that make you a wiser web professionals
* Equipment & Accessories – computers (desktop and laptop), keyboards, mice, cables, power strips, backup systems, phone systems, copier, fax, etc.
* Internet – hosting fees (bandwidth, storage, domain parking, etc.), ISP charges, domain registrations and renewals
* Advertising – Buying traffic, banner spots, audio advertising.
* Utilities – electricity, water, those important little things that keep the juice and warmth running through your office
* Phone – cell phones, long distance, fax lines, 800 numbers, all related to phone service except the hardware (see equipment itself)
* Rent/mortgage – the office rent if you aren’t operating out of your home (see tax specialist for rules on dividing up your home “office”, it gets somewhat complex)
* Taxes – uncle sam needs his cut of course, da bastid!
* Licensing – your business license
* Insurance – building, content, liability, keyman, etc.
* Payroll – the busy beavers that help you build your dam
* Maintenance – computer and equipment repair, plumbing (got to keep the plumbing in order), landscaping for office, etc.
* Automobile – this for the mileage or expenses attributed to a vehicle used in business
* Stock/Inventory – this is an analysis of actual money expensed for new stock/inventory (it should also include a projection of money you intend to spend on content). New content in the webmaster arena really. Plug-in content, custom-written articles, scripts, etc. Items you buy to keep site visitors coming back for more.
* Other – anything I’m missing here!

The Bottom Line = income – expenses +/- inventory fluctuation = net profit

Net profit becomes much easier to figure once you put all the numbers down. All you have to do is subtract your expenses from your gross income and add or subtract the inventory fluctuation to come up with your profit. We didn’t discuss probably one of the most important assets of any business: you. Your time is a critical element and when looking at the net profit and the time you’ve expended you can now make a more educated decision if effort and resources being spent are producing the desired outcome. You can also come up with percentages so you can see where most of your money is going and make a plan to try and reduce these expenses.

If your inventory of content supply (such as articles) is bloated, reduce or stop buying content until you get it used on your site(s) or article directories! If you have a bunch of books for education and they are collecting dust instead of creases from reference, then reduce your education purchases. Have 4 toner cartridges yet only use 1 every 6 months? Keep just one on hand for backup instead. Do you have webhosting for sites you never use? Park the domains or use pointers or consider selling them (income) instead. Do you keep the office so hot everybody dresses in shorts? Turn the heat down (yeah, I realize the atmosphere might not be as visually appealing). You get the idea.

If you make $100,000 and your expenses are $80,000, you didn’t make a lot for your effort. So by working and planning to reduce expenses from 80,000 to 40,000 look what you did to your net profit? A wise man or woman knows the quickest way to lose a buck is to not understand where it came from and where it goes.

Business is much more than working to increase income through marketing, it is also about reducing expenses and thereby improving profitability. By doing a P & L statement you can keep abreast of how your business is performing more often than once per year when you do your taxes. It also will help you in your goal setting and business planning for the future. If you aren’t doing this right now then stop and ask yourself if you are serious about your business or just pretending to be in business.

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