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I’m a digital marketing and analytics expert, but I’ve got a confession to make. The journey to exceptional marketing results (read: big increases in leads and sales) does not start online. It doesn’t start with an awesome website, search engine optimization (SEO), or pay-per-click (PPC) advertising. The process of building a high-performance advertising and marketing program does not start with content or inbound marketing and it definitely doesn’t involve Facebook or Twitter!
The journey to exceptional advertising and marketing results starts in the last place most business owners think to look. It starts with your income statement. That’s right. If you’re really serious about getting more leads and a higher return from your advertising and marketing investments, you need to take a long, hard look at your income statement (you know, that report put together by your accountant, or your wife, or your friend—that thing you thought was only useful for taxes—yeah, that thing).
In this post, I’m going to walk you through a few income statement mistakes, and I’ll explain how doing things a little differently can have a major impact on your advertising and marketing results. With any luck, I’ll also be able to make things a bit more interesting than the typical trip to your accountant’s office!
Financial Statements: The Minimum You Must Know
You don’t need an MBA to build and run a great, highly-profitable, local business (although, to be fair, my partner has his MBA and it’s from a fairly well-known school located in Cambridge, MA). You also don’t need to be an accountant. What you DO need is a basic and practical understanding of the financial statements that provide a look under the proverbial hood of your business. And you won’t get to this level if you have your sister (or wife, or friend) create your income statements using some cookie-cutter template that you downloaded from QuickBooks or Sage 50 (formerly Peachtree).
There are three financial statements you should be producing and reviewing monthly. They are your: Balance Sheet, Income Statement, and Statement of Cash Flow. I’m not going to explain each one here. M&T Bank has put together a great overview of each of the three statements—what they tell you and how to use them. You can view it here, and I highly recommend you take the time to read it!
Common Income Statement Mistakes
Mistake #1: Not Enough Revenue Categories
An income statement has several sections: Revenue (also commonly called Income or Ordinary Income), COGS (Cost Of Goods Sold), Gross Profit, Expenses (sometimes called Operating Expenses or Overhead), and Net Profit (also commonly called Net Income). Service companies might use Cost Of Sales instead of COGS—they’re the same thing. Most business owners I know have an income statement that started as a template downloaded from QuickBooks or Sage 50 (which acquired Peachtree). Regardless of your industry, the previously listed sections are going to be found in every income statement template.
It’s where you take things from here that makes all the difference. For example, let’s say you’re an HVAC contractor and you serve commercial and residential customers. The tutorials in QuickBooks might suggest that you create two different revenue categories—one for installation and one for service. While there’s nothing technically wrong with setting things up this way, you’d be far better served if you paused and spent some time thinking about your business in more detail.
If I were an HVAC contractor serving commercial and residential customers and I provided service and installation, I’d want to be able to quickly see how much of my revenue comes from each of the following categories:
- Commercial installation jobs
- Commercial service jobs
- Residential installation jobs
- Residential service jobs
You could argue that things should be broken out even more granularly than this, but even this level is a big improvement over listing only installation and service. One reason it’s important to differentiate revenue from commercial jobs from revenue from residential jobs is because very different forms of advertising are required to generate one vs. the other. If you invest in a big advertising push to generate residential jobs, in the months following the campaign, you want to be able to look at your income statements and quickly see whether your revenue from residential jobs is on the rise.
Another reason to create more granular revenue categories is so that you can quickly calculate and compare the profitability of one customer type or job type vs. another. For example, how profitable is your commercial work, installation and replacement, vs. your residential work? Insights from such an analysis can have far reaching and very powerful marketing implications.
Mistake #2: Misplaced COGS
Of course, even with the right revenue categories defined, you won’t be able to see which lines of business are the most/least profitable unless you also take the time to set up your COGS categories correctly. This leads to the second mistake I see business owners making—they place things that are really COGS under the Expense heading in their income statement. This inflates their gross margin and can lead to all sorts of marketing mishaps.
Using the HVAC contractor example above, where would you put the salaries of your HVAC technicians? Most HVAC contractors lump them under Expenses—along with the rest of their sales and administrative staff salaries. That’s not where they belong. You want to put their time under COGS. If you’ve got one guy that does all your commercial jobs and a different guy that does all your residential stuff, you might want to list them separately.
With things set up this way, you can quickly see the gross profit of your commercial business vs. that of your residential business. Being able to perform this type of analysis is really important because you can’t be a great marketer without being able to look at things “on the margin” (the gross margin). If you haven’t properly defined your revenue categories and/or you’ve put things that really should be COGS under the Expense heading in your income statement, whatever your gross margin is, it’s wrong.
Mistake #3: Putting All Advertising & Marketing Expenses in One Category
If you want to measurably improve your advertising and marketing performance, you MUST accurately track your results—period. Pull out your most recent income statement and look under the expense heading. If you have a single line item for Advertising and Promotion, you’ve got things set up incorrectly. At a minimum, I like to see a list of all my marketing campaigns, how much I’ve spent on each one in a given month, and how many leads and sales have been generated by each campaign.
For a typical local, home service business, you might have the following advertising expense categories:
- Advertising – Direct Mail
- Advertising – Email Marketing
- Advertising – Events
- Advertising – Memberships
- Advertising – Pay Per Click
- Advertising – Pay Per Lead
- Advertising – Print
- Advertising – SEO
- Advertising – Website
- Advertising – Yellow Pages
Now, you’re not going to see which advertising channels have generated the most/best leads and sales from your income statement. To see the leads and sales that have been generated by each marketing campaign, you’re going to need to create a separate marketing performance dashboard. But if you pull out your most recent income statement and you have all your advertising and marketing investments lumped into a single generic category—something like “Advertising and Promotions”, you’re going to want to expand things a bit like I’ve done above.
By expanding the advertising expense categories in your income statement, you’ll be in a much better position to detect broader trends. For example, if you’ve cut back on your yellow page advertising and simultaneously increased your investment in SEO and PPC, and your revenue is up considerably from last year, that might be something you want to look at in more detail in your marketing performance dashboard reports.
Closing Thoughts & Recommended Next Steps
I’ve been involved in online marketing and marketing technology since I graduated from college back in the 90’s (gasp!)—clearly I’m sold on the power of the web for driving business growth. If you haven’t had us evaluate your website (it’s free), you should do that by entering your site’s address into the form below:
But, when it comes to advertising and marketing, many business owners get a case of “shiny object syndrome.” Before you run off and advertise on the latest and greatest social media site, take a few minutes and review your income statement. Do you have everything in the right place or do you have some things that really should be COGS listed as Expenses? If you can’t determine your gross margins by each line of business, you haven’t got things set up correctly. The output is poor marketing decisions.
This stuff might seem a bit boring, but it’s really important. When set up correctly and with the right person reviewing it, an income statement plays a key role in creating or evaluating your overall marketing strategy. At Blue Corona, we’re more than digital marketing experts—we understand business. If you’d like someone to help you improve your income statements and/or walk you through how your income statements can help you drive better marketing decisions, drop us a line!
About The Author: Ben Landers is the President and CEO of Blue Corona, a data-driven, inbound internet marketing company. Submit an inquiry to book Ben to speak at your next conference or event.
View more blogs by Ben Landers