When you look at your income statement and balance sheet, remember for any one time period they are only as accurate as when you book revenue and the associated expenses to generate that same revenue.
So if my employees work on a job in April that I don’t bill for until May, then April’s expenses will be heavy and May’s will be light, which will make April’s profit lower and May’s higher. If I buy a three month supply of some materials in May, then the expenses for May will be higher, dinging May’s profit.
I could allocate the expense, which means I buy it in May but expense it over three months, which solves the problem, but there are so many expenses to allocate, that normally we stick with just the big ones.
If I buy a vehicle, I allocate the expense over five years – that’s called depreciation. I’ll take 1/60th of the expense each month for five years.
The point is that to have accurate monthly financials, we need to book revenue in the month we bill it, and have the expenses associated with generating that same revenue showing on that statement. When revenue and expenses are not lined up in the same month, then the bottom line will be choppy. If I look at longer time periods such as three months, and year-to-date numbers, the real profit margin should smooth out.
I still need help with this…