Listen instead on your Monday Morning Drive:

Too often, a month-close meeting looks like a bunch of people peering at a spreadsheet or P&L — and no one knows what to do with it.

We previously covered P&L statements and discussed how to make them actionable. Your cost of goods sold aligns with income; you have columns of percentages, and you look at everything as a percentage of revenue.

So if you generate an actionable P&L according to the principles in that previous post, you should start having productive conversations around actionable metrics. And the month-close meeting is the place to do it.

The P&L shows you where action is needed; the month-close meeting is where that action manifests.

The Makeup of a Month-Close Meeting

Month-close meetings should take place once a month. They don’t have to be long; sometimes 30 minutes is all that’s needed.

Ideally, your bookkeeper should close the previous month ten days after the month ends. They’ll probably need another week or so to send you the report. This means you should have a month-close meeting by the 20th or so.

(That’ll shock some owners looking at month closings that are 60 and 90 days past, but that’s a different problem.)

Who needs to be at the month-close meeting? The managers of all the cost centers of your business.

Finance, sales, operations, and project management are all cost centers. They all own processes and outcomes that affect P&L. HR and your office manager probably need to be there as well.

If you have 10 employees, you might have three to five people in the meeting. If you have 100 employees, the meeting will max out at about 12 to 15 people.

Preparing for the Meeting

At each month’s close, your master spreadsheet should be updated with the latest month’s data. This way, you can see the current month, the same month from the previous year (which can be a helpful reference), and a trailing 12-month average.

Then, before your month-close meeting, circulate the report to the managers who will attend. Their job begins here. Analyze the month’s report and cite anything that seems off-base. Maybe it’s just a timing issue, coding problem, or entry error, but now is the time to get those questions out of the way so the meeting isn’t clogged with nuts and bolts.

P&L statements rarely come out perfectly clean the first time around; there’s always at least one revision. Once the revised P&L is 95% correct, it’s ready for the meeting.

It’s also important for each manager to know their role in the meeting.

They need to know they’re in attendance because each of their teams influences key metrics in the P&L. They should know which metrics their teams influence and be ready to review and comment on them during the meeting.

However, in the interest of productive meetings, they don’t need to comment if there’s nothing to comment on. If their metrics are normal, they can leave time to focus on anything that needs attention.

The person running the meeting will likely already have three or four key variances pulled for discussion. Other attendees might point out additional items to be discussed and add them to the list.

The Purpose of the Meeting

The purpose of the month-close meeting is two-fold: looking back and looking forward.

Looking Back at Anomalies

The purpose of the month-close meeting is to understand the results of the P&L report, and anomalies are a key part of those results.

It’s okay to occasionally discuss how consistent other factors have been and even question whether this is a good or bad thing. However, anomalies will be the meeting’s primary focus.

The management team will discuss the key anomalies in the numbers, ensure everyone understands them, and determine what (if any) corrective action needs to be taken for each. That way, when people leave the meeting, they know what to do.

Actionable financial reports make it possible for meetings to result in meaningful action — if they need to.

Forecasting P&L

Once you’re finished looking back at anomalies, review your forecast P&L.

These look a lot like backward-looking P&Ls except they’re based on forecasted revenue, which changes from month to month.

A budget forecast looks to the rest of the year or the next 12 months. If you’ve addressed the anomalies in your backward-looking P&L, you need to apply that information to your forecast.

Sometimes the forecast changes based on recent experiences with the past. This is the meeting’s other purpose: to determine whether you need to adjust the forecast based on what you learned.

How accurate have you been in revenue forecasting? Do you need to adjust some percentages on the cost of goods sold? Are changes in buyer behavior affecting your pricing and, therefore, your margins?

As you gain new information, apply it to your forward-looking model, making it increasingly accurate.

Two Examples

1. Cost of Labor

Say you find this anomaly during your month-close meeting: Your cost of labor as a percentage of revenue is climbing at an alarming rate you didn’t anticipate.

Everyone realizes something is happening either on the sale or delivery side to reduce labor margins.

Reviewing the P&L for the past couple of months, you find a slight trend in this direction you probably should’ve caught earlier. It was just so small that you didn’t notice it.

But now it’s getting big, and corrective action is needed.

The next step is to conduct further analysis to determine the anomaly’s source. Labor costs could rise for any number of reasons. Are your costs increasing? Are your prices not keeping up with them? Are there protocols and disciplines that aren’t being followed correctly?

The initial corrective action may be identifying the real reason for the increase. If the reason is immediately obvious, make a change right away.

Do you need to improve your price enforcement? Do you need to raise pricing? Do you need to do a better job of buying? Do you need to listen to buyers about what things actually cost? Do you need to improve your estimation?

Whatever it is, implement that change.

The great thing about reviewing your P&L monthly is that the numbers tell you a story. When they show you an anomaly like this, they tell you, “Action needed! Do something!” They help you break negative cycles every month so you don’t end up with 12 months of compounded losses.

2. Streaming Studio Revenue

This time, when you review your P&L, your team notices that your streaming studio revenue has dropped to almost zero — a definite anomaly.

You investigate why. Why did this number change? Is the drop a good or bad indicator? Is it a reflection of the customer’s buying habits?

Here, you find that the anomaly isn’t good OR bad; it’s just information. The information doesn’t reflect a mistake or a need for change — just the pent-up demand for in-person meetings. Customers simply don’t want streaming right now, and there’s nothing you can or should do about it — except remember that streaming may return.

Seasonality plays a role in our business. People purchase in droves at one time of year, and no one buys at another time. So, instead of abandoning your streaming studio, you decide to keep it ready for when demand increases again.

Besides being aware that demand will probably return, the action item may be to let your team know not to discourage customers when they ask for streaming services again.

In the meantime, you can get extra value from your studio in other ways. Use it to host demos and client discussions, produce marketing videos, and promote solutions.

Your Next Step: Scenario Modeling

Once you’ve mastered reviewing standard business metrics, the next level of exercise is learning to model different scenarios.

Let’s return to our forecasting and cost of labor example. You can plug a new labor cost into the budget forecast and identify the likely outcome of that scenario. But modeling is manipulating multiple variables and testing stronger choices.

For instance, maybe you’re concerned with keeping your cost of labor down when you need to stop fighting the cost of labor and accept it.

Have an honest conversation with yourself. Say, “Here’s what’s happened to my cost of labor. How will that affect my pricing? My revenue balance? My cost of goods sold? How will that manifest in my bottom line?” That’s business modeling.

Back to our labor cost example: Most people are happy to make 20 to 30% gross profit on direct labor. But if you want to make 50% gross profit, relieving a lot of risk and emphasizing the value you create for your customers, you’ll also need to de-emphasize your equipment pricing because you can’t charge your customers more.

So, in charging higher labor rates, you discount equipment — and end up selling at the same price. Only modeling will tell how that affects your bottom line over the course of a year.

The next management stage involves modeling long-term ramifications and making more complex decisions that could dramatically improve your bottom line.

While your company may raise labor rates and increase your equipment discount to sell at the same price, your competitor may lower labor rates and charge more for equipment.

You and your competitor can operate at the same profitability for a given revenue number. Both companies become more profitable as revenue increases because you’re both inherently scalable for a narrow income value.

However, if I double both companies’ income, both models break, but one model breaks sooner. I’ll let you guess which one that is.

If you’re modeling this and trying to grow your business, you can now factor expected growth into your model. That way, you can make better decisions sooner rather than discovering that 50% growth took you away from a profitable position.

Results

The result of a good month-close meeting is a management team that knows how to identify and investigate anomalies, asking questions like:

• Is this a good or bad indicator, or is it just information?
• Can we explain why it happened? Is the source on our side or the customer side?
• Can we (or should we) do anything about it?
• If so, what?

They also understand how long it takes to turn the ship. It’s not impossible to turn a supertanker, but it takes time. Even if they implement a change the day of your monthly meeting, they may not see that correction manifest on the P&L for 90, or even 120, days.

But they will see it. And all this clear communication will result in managers who understand exactly how their and their teams’ daily actions affect the P&L.