Accounting

How do I read a profit and loss properly?

Read it as a sequence of subtractions rather than a list. Revenue, less the direct cost of delivering it, gives gross profit — the money available to run the business. Less operating costs gives operating profit. Rationale Services structures yours so each of those steps is visible and each movement can be traced to something you control.

The number to look at first is gross margin as a percentage, not as a dollar amount. Dollars move when volume moves and tell you nothing about whether the work is still worth doing. A margin percentage that drops while revenue grows means you are selling more of something less profitable, or your costs moved and your prices did not.

When a margin moves, there are only four places the cause can be: price, volume mix, input cost, or something recorded wrongly. Working through them in that order is how you get to a cause instead of a theory. Mix is the one owners miss most — total margin can fall with every single product's margin unchanged, simply because the cheaper line grew faster.

Operating costs behave differently and should be read differently. Most are fixed in the short term, so the useful question is not "did it go up?" but "did it go up as a share of revenue?" A cost rising in step with revenue is normal. A fixed cost rising as a share of a growing revenue line is a problem worth a phone call.

How do I read a balance sheet?

It has three parts: what the business owns, what it owes, and the difference, which belongs to the owners. The useful reading is not the total but the composition — how much of what you own is actually cash, how much is money customers have not paid, how much is stock sitting on a shelf, and when the things you owe come due.

Four lines carry most of the signal. Cash, against what is due to be paid in the near term. Receivables, which tell you whether revenue is turning into money and how fast. Inventory, which is cash you have already spent and cannot use. And debt, split between what is due soon and what is not.

Balance sheets also catch the errors a profit and loss hides. An account that grows every month and nobody can explain, a negative balance where there should not be one, a loan balance that does not agree with the lender's statement — each of these means something in the profit and loss is wrong too, because the two statements are two views of the same entries.

Should we be on cash or accrual for management reporting?

This is a reporting decision with real consequences for how you see the business. Cash reporting shows money in and out, which is simple and tracks your bank account. Accrual reporting records revenue when it is earned and costs when they are incurred, which matches effort to result in the right period. Rationale Services can produce either, and will tell you which fits how you operate.

The difference matters most when there is a gap between doing work and being paid for it. A contractor who bills on completion looks poor during the build and rich on payment under cash reporting, when neither is true. Accrual smooths that out and lets you compare one month to the next honestly.

Cash reporting has genuine advantages when the gap is short and the business lives close to its bank balance. For a shop paid at the till, cash reporting is readable and close enough to reality to manage from.

In practice many clients run accrual statements for management and keep a cash view beside them, because the two answer different questions. Whether a particular basis is available to or appropriate for your business depends on your circumstances, and that is something we work out with you and with whoever prepares your return.

How do you work out cost of goods sold and margin?

Cost of goods sold is what it costs to deliver what you sold — materials, direct labour, freight in, subcontracted work, production-related processing fees. Rationale Services defines the line for your business, applies it consistently, and separates it from operating costs so your gross margin means something month to month.

The definition is where most of the value is, and it is a judgement rather than a rule. Delivery drivers may be a direct cost in one business and an overhead in another. The question to settle is whether the cost moves with what you sell. Once that is decided it has to stay decided, because a line that quietly changes definition destroys your own history.

For product businesses, inventory is the hinge. Cost of goods sold is only right if stock movements are recorded, which means your purchases, your stock on hand and your cost of sales have to agree with each other. Where inventory is not tracked at all, gross margin is an estimate and should be labelled as one.

For service businesses the equivalent problem is labour. If the people doing the work are a direct cost, your margin tells you whether the work is priced properly. Buried in overhead, it does not, and you can grow a service line for a year without knowing it loses money.

Can you help with budgeting and explaining the variances?

Yes. Rationale Services builds a budget from your own history and your plans for the year, then reports actuals against it each month with the differences explained. The point of the exercise is not the budget document — it is the monthly conversation about why reality differed from the plan.

A usable budget is built bottom-up for the things you can forecast and conservatively for the things you cannot. Revenue by line, direct cost as a margin assumption, headcount month by month with the real cost of each person, and the known fixed costs. Where a number is a genuine guess, we mark it as one, so later variance analysis can distinguish a bad assumption from bad execution.

Variance work has one rule worth insisting on: separate price from volume. Revenue short of plan because you sold fewer units is a different problem from revenue short because you discounted, and the two have opposite remedies. The same split applies on the cost side — paid more per unit, or used more units.

In month one or two the variances are mostly budget error. By month four they are mostly information. Clients who keep going past the first awkward quarter get a planning instrument; clients who abandon it get a document.

Can you handle more than one company or entity?

Yes. Rationale Services keeps each entity's books separate and complete, then produces combined reporting across them so you can see the group as one business and each part on its own. Both views matter: the group view for overall performance, the entity view for knowing which part is carrying which.

The technical work is mostly discipline about transactions between entities. Management fees, shared payroll, loans and cost allocations have to be recorded on both sides and eliminated in the combined view, or the group's revenue and costs are inflated by money that never left the group. Getting this wrong is the most common reason multi-entity reporting looks impressive and means nothing.

Allocations need a stated basis and a stable one — shared rent or shared administrative cost split by headcount, floor space or revenue, decided once and documented. An allocation that changes without explanation makes entity-level trends meaningless.

Use the same chart of accounts across entities. It costs a little to set up and it saves the group view from being rebuilt by hand every month.

How do the books and the tax records stay consistent?

Rationale Services keeps your books in a state where the figures handed to whoever prepares your return are complete, reconciled and supported, and records the differences between management reporting and the tax basis where they arise so nobody has to reconstruct them later. The result is a handover that takes days rather than weeks.

Some things are treated differently for management purposes than for the return, and the right approach is to record both treatments rather than pick one and lose the other. Keeping a clear schedule of those differences, maintained through the year, is what stops the annual argument about which number is right.

In practice that means keeping the supporting detail available — fixed asset schedules, loan amortisation, owner transactions, inter-entity activity — in a form that answers a preparer's questions directly. We also coordinate with your preparer during the year when something unusual happens, rather than presenting it as a surprise after the year has ended. Where Rationale Services also handles your tax work, that coordination happens inside one engagement; see tax preparation and filing.

Do you provide audited or reviewed financial statements?

Rationale Services produces management accounts and internal reporting: closed monthly and annual statements, management reporting packs, budget and variance reporting, and the supporting schedules behind them. Work of that other kind — audited or reviewed financial statements and similar assurance engagements — is referred out, and we will help you get it in front of the right practitioner.

Formal business valuations sit outside our scope too, and are referred the same way. Where the question is commercial rather than formal — what a business is earning, what drives those earnings, what a buyer would ask about — that work sits under business consultancy.