Your Origami Monthly Report is a simple and succinct summary of the most important numbers in your monthly financial statements. These posts help you understand and use this valuable information to manage and steer your business.
Thanks to Kris Sparrow, CPA, co-founder of Origami, and Partner at Origami Professional Corporation, for authoring this post.
In Origami’s earliest days, roughly a month before we had incorporated - I wrote a blog post on why small businesses need financial statements (this post was subsequently updated and reposted in 2021). Today as I revisit it, I can appreciate its earnestness. If I didn’t know just how callow its author, who had only just passed his professional accreditation exam, was, it would even strike me as thoughtful.
What the post lacks is the context of over a decade's experience in understanding how busy entrepreneurs truly utilize their financials. It overlooks the fact that, for every entrepreneur, two burning questions should be addressed on at least a monthly basis:
- How much do I need to sell to accomplish my goals while providing a fair living for myself and my employees?
- If I can't generate more sales, how much can I reasonably pay myself and my employees while still reaching my objectives?
We provide our clients with answers to these critical questions by simplifying traditional financial statements in the following manner:
Real Profit: This represents the percentage of your Real Sales that you can keep on a pretax basis. The absolute minimum you should aim for is 10%, as anything lower jeopardizes both your and your employees' livelihoods. However, we don't want you to settle for just 10%. By default, the target will adjust as your performance improves. We present the figures on a pretax basis because tax calculations are complex, and the small business tax rate in Canada has a minimal impact.
Real Sales: This is the amount of sales you retain after deducting expenses for subcontractors, materials, and merchandise. We use the term "Real Sales" to underscore that sales should be evaluated after accounting for your direct costs. Why? Small businesses often have less control over their input costs compared to larger enterprises. So, we prefer to view sales after factoring in these costs. This figure often aligns with the traditional Gross Profit measure in accounting, but it may differ when a business classifies labor costs as a cost of goods sold. Notably, labor costs are excluded from the calculation of Real Sales to facilitate the determination of a Salary Cap.
Salary Cap: We've borrowed the term "Salary Cap" from North American professional sports. Given your objectives, the Salary Cap is the maximum amount you can afford to pay yourself and your staff at your current level of Real Sales. If you consistently operate at or below the Salary Cap, you're on track to meet your goals, and we will find ourselves fighting the urge to hit you with an air high five at every opportunity. If you are operating over your Salary Cap, it is time to boost Real Sales and exercise caution when hiring.
Trailing Twelve Months (TTM): Due to factors like seasonality and accounting quirks such as year-end entries that condense a full year's activity into a single month, we present the Key Numbers on a Trailing Twelve Months basis. We encourage you to manage with this time frame in mind.
We still love and admire the traditional financial statements and encourage our clients - who we also love and admire - to read them (a great primer for doing so can be found here) but they are not something we are interested in forcing down your throats.
If you only ever review the Key Numbers, set meaningful targets, and manage to them, we are confident that you will greatly improve your odds of success in your small business.