A free tool from The Alinement Brief
The Three-Question Monthly Review
One sheet of paper, three questions, after every month-end close. Gross margin, break-even sales, and whether the profit turned into cash. Next month, the same sheet, with last month's on top.
After the close
Take out last month's statements and answer three questions.
You need two reports: the P&L and the statement of cash flows. Accurate statements tell you what happened. These three questions help you decide what to do next.
- Gross margin: Has it improved or declined over the last three months, and do you know why?
- Break-even: How much in monthly sales do you need to cover your operating costs?
- Cash flow: Did last month's profit turn into cash from operations? If not, where did the cash go?
How to fill it in
Three numbers, and the reason behind each.
- Gross margin, three months side by side. Sales, less the direct cost of producing or delivering those sales, as a share of sales. One month tells you little. Three months tell you the direction. Write the direction down, and the reason: material costs, labor, discounting, the mix of work, or prices that are simply too low. If nobody can name the reason, that is the finding.
- Break-even sales. Add up the expenses that continue whether sales are good or bad: rent, salaries, insurance, software, utilities. Divide that total by the contribution margin: the share of each sales dollar the business keeps after all the costs that vary with sales, not only cost of sales. The answer is the monthly sales below which the month loses money. Every point of margin you give up raises that number. Count fixed production costs with the fixed expenses; your accountant or advisor can help establish both figures.
- Profit next to cash. Write net income from the P&L next to cash from operating activities, the top section of the statement of cash flows. Both are correct; they tell you different things. If they differ, look at what changed: customers taking longer to pay, cash tied up in inventory, bills paid down. Write the biggest reason on the sheet. Equipment, loan principal, and owner distributions change the bank balance without touching operating income, so leave those out of this line.
A composite example, round numbers on purpose
What a filled-in sheet looks like.
Sales of $100,000 in September against $65,000 of direct costs is a 35 percent gross margin. July was 38, August 36. Three points in three months is a slide. Fixed expenses of $28,000 a month divided by 35 percent is $80,000 of sales to break even; at 33 percent it would take about $85,000. Net income was $7,000, but operations used $3,000 of cash, because receivables grew by $10,000: billed, not collected. Three numbers, and the reason behind each, on one page.
Worksheet: alinement.com/brief/tools/three-question-monthly-review
Part of an ongoing series of tools for the operating rhythm. Read the full story behind this one in Issue 21; the difference between profit and cash is in Issue 4. Or browse every free tool.