I am including the only accounting joke I have created “What is the difference between Russian profit and American profit?

A Profit and Loss Statement is one of three important financial measurement tools. It captures five areas of financial measurement.

There are two methods of recognizing income and expense.

Cash Based Accounting will only recognize income when the money is in the bank and will only recognize expense when it is paid.

Accrual Based Accounting recognizes income as soon as it is billed and recognizes expense when you receive the invoice.

I prefer Accrual Based because it shows the complete financial picture, however you must remind yourself that Accrual Based Accounting may not reflect reality if everyone billed has not yet paid and if you have not paid all of your bills.

That’s why the Balance Sheet was invented. Among other things it accounts for the money people still owe you (Accounts Receivable) and the money you have not yet paid (Accounts Payable)

Revenue: The money you receive for doing the work you do. I measure everything as a percentage of Revenue so Revenue always is 100%

Cost of Sale: The money you spend to do the work. I only count costs that can be directly tracked to specific jobs. If a cost is shared between two or more jobs it should go into Overhead. Ie…you cannot accurately track the amount of gasoline used by your truck for a specific job so usually gasoline is a line item in overhead.

The usual divisions in ‘Cost of Sale’ are:

• Labor (the hourly rate you pay and does not include benefits)
• Equipment(the stuff you install that has a serial number)
• Material(the stuff you install without a serial number)
• Sub contractors(sometimes it is better to hire someone, who is not a full time employee, to do part of the work. They have a back hoe and know how to use it. )
• Permits(Often, the city or municipality requires you to pay for a permit which ‘permits’ you to do the work)
• Warranty reserve(this is money you set aside in the event that you have to go back and fix something and don’t charge the customer. Usually, work is warranted for 12 months only.)

A financial model I like puts the Cost of Sale at 60% of Revenue or less.

Gross Margin: The money left over after you subtract the Cost of Sale from the revenue. I’m thinking 40% or more is good.

Overhead: All remaining expenses. A great target is for overhead to be 30% or less.

Net Profit: Any money left over after you subtract the overhead from the gross margin. This is usually the money the government takes 35% or more from you. We would like this to be 10% or more.

Net Loss: This happens when the overhead costs are more than the gross margin. If you keep doing this your business will die. Currently, the government has not found a way to tax a loss.

It is important to remember that the purpose of Profit is to pay the expenses on the balance sheet. You cannot put loans or revolving credit lines on the P & L (usually P & L captures only 12 months at a time).

The joke: American profit is “Net Profit” and Russian profit is “Nyet profit”

Over the next number of weeks, my intention is to alternate “Book Reviews” and “Random Thoughts” every other week.

My “Random Thoughts” will focus on a series of seven views regarding the importance of “Counting” in a business.

Dick and Sandy Pirwitz are two of our dearest friends. Some think that Dick and I look like ‘ brothers from a different mother’. In fact, a few years ago a beautiful little four year old looked up at Dick and said, ‘Bubba Don, pick me up’  and her mother said, “Stella, that isn’t your Bubba Don.

Sandy, while a bit vertically challenged,  is taller than Shaq in intellect and zest for life. She makes the energizer bunny look old and slow.

Sandy and I share a love for books. She has bookcases filled and is looking for more bookcases.

Over our quarterly coffee , she introduced me to Daniel Coyle’s book, ‘The Talent Code’.

From the title of the introduction to the last page (236 ) this book explains a lot about great talent. Coyle provides compelling evidence that “Greatness isn’t born, it’s grown”

The intriguing title in the introduction is, “The girl who did a month’s worth of practice in six minutes”.

From his introduction.

“Every journey begins with questions, and here are three:

1. How does a penniless Russian tennis club with one indoor court create more top-twenty women players than the entire United States?

2. How does a humble storefront music school in Dallas, Texas, produce Jessica Simpson, Demi Lovato, and a succession of pop music phenoms?

3. How does a poor scantily educated British family in a remote village turn out three world-class writers?”

Daniel’s search into what he calls “Talent hotbeds” helped him to understand the nature, the ‘Code’, if you will, of how exceptional talent is grown.

This book is divided into three parts:

1. Deep practice
2. Ignition
3. Master Coaching

The major factor in talent growth is understanding a neural insulator called myelin. As we use neural pathway repeatedly the myelin wraps itself around the pathway “the same way rubber insulation wraps a copper wire, making the signal stronger and faster by preventing the electrical impulses from leaking out”.

Talent is formed says Coyle by “Deep Practice”. I’m reminded of the saying, “Practice makes perfect” which is incorrect.

“Perfect Practice makes Perfect and bad / flawed practice doesn’t”.

This first part of the book really explores in a very compelling way the elements of ‘Deep Practice’ and supports that exploration with fascinating stories of real people discovering this most important part of the ‘code’

But what motivates people to engage in ‘Deep Practice’ is revealed in the second part of the book-‘ignition’.  How people ‘catch on fire’ and are willing to spend the time and pain growing to greatness is extraordinarily interesting.

And finally, what are the people who teach others to grow their skills like?

The third part of this rich book – ‘Master Coaching’- was really eye opening and significant to me.  I’ve met a few ‘Master Coaches’ over the years and this part of the book demystified many of their practices.

As I continue to read I’m struck at how similar themes appear in writings by others.

In Marcus Buckingham’s ‘First Break all the Rules’ on page 84 he echoes the Myelin reality.  “Talents are the four-lane highways in your mind, those that carve your recurring patterns of thought, feeling or behavior”

And Malcolm Gladwell referred to the 10,000 hour rule in “The Outliers” which is echoed in this book on page 51. “Every expert in every field is the result of about 10,000 hours of committed practice call ‘deliberate practice’ and which Coyle calls ‘Deep Practice’.

All of this leads to defining our talents which is the focus of our next book review in two weeks.