A Good Quarter vs just a !*@!$ Quarter

The denouement of yesterday’s company meeting was the discussion of the sales numbers and, most importantly, the employee bonus. We all knew the quarter was good, as the employee newsletters had described it as “Wow, three record months in a row!” and “New product sales were up over 4Q2006!!” (Exclamation points == good) When rumors of “celebration planning” leaked out, there was optimism that there might be a bonus.

Revenue - Expenses = Profit!

The formula looks like this:

X*(P-Payout) at end of Q1
X*(P-Payout) at end of Q2, less amount paid in Q1
X*(P-Payout) at end of Q3, less amounts paid in Q1, Q2
X*(P-Payout) at end of Q4, less amounts paid in Q1, Q2, & Q3

Where:

X is the percentage of profit sharing allowed.

P is the profit, excluding allowances for anticipated product returns.

Payout is the amount of cash the Founders wish to extract from the company each year in exchange for their services. It is taken out first, and is not quartered.

So far, so good.

A lever. Because this is a private corporation, there is more wiggle room in how aggressively things are booked. A large order coming in on March 29th may not be “processed for the books” until April 2nd, thus counting towards 2Q2007’s revenue. In effect, the cash flow of the company remains the same, but bonus calculation is staggered. (In one case, the company might do this if it has a good Q1, but anticipates a bad Q2; profit would drop, creating a negative bonus.)

Another Lever is budgeting. If the Vice Minister of Shiny Objects makes a strong case for needing more metal polishing grit than originally anticipated, the “budget buster” can be approved by the executive team. By extension, it comes out of profit. Reducing profit has some benefit to the Founders because it also reduces corporate taxes.

The Punchline

For this quarter, our revenue exceeded budgeted revenue. Expenses were within budget. Our profit was equal to the Payout. By the formula above, the bonus is essentially zero. Cliff made a big deal about the good numbers. Fine. There were two ways this could have been handled well and one not well:

Depicted above is my 1Q2007 bonus. If 2Q2007 stacks up the same way, I’ll be able to afford a bag of potato chips.