Archives for March 2019

Tips for Making Your Accounting System More Useful (Part 2 of 2)

by Tom Grandy

Last month we talked about creating useful categories and what “other” meant when it showed up on your P&L statement.  We discussed how to develop a budget.  This month let’s look at a few more items concerning your accounting system that might be helpful.

  • Break Material Costs Out Buy Department – Having worked with contractors one-on-one for over 30 years I can honestly tell you less than 5% break their cost of materials/equipment out by department.  That may not seem like a big deal but it is!  When it comes to setting profitable hourly rates by department, knowing what material and equipment costs are is critical.  Why?  The reason is that materials/equipment are marked up before they are sold to the customer.  The mark-up amount provides gross profit which is a key element in setting profitable hourly rates.  The more markup you have, the more overhead cost can be absorbed in order to lower your hourly rate.
  • Budget Your Salary – If the cost of rent, insurance, or gasoline were left out of your pricing equation the end result would be an hourly rate that doesn’t cover all your costs of doing business and therefore does not generate a real net profit.  That principle seems pretty straightforward and most owners would never leave out actual costs that are that significant. Correct, however it happens every day.  Owner after owner fails to input their salary as an expense into the P&L statement with the reason being “I will live off of the profit the company makes.”  That sounds smart and even a bit humble…but it’s not!  If rent isn’t in your hourly rate, the rate charged will not cover your rent.  Bingo!  If your salary isn’t in the cost of doing business it won’t be in your hourly rate either and you won’t get paid.
  • Realize What Your Accounting System Is Not Telling You – What your accounting system is telling you is very important.  However, what it is NOT telling you is just as important, if not more important.  There are two major expenditures that will never show up in your accounting system that are very real costs of doing business and have the potential to put the company out of business.  Let’s take a look at both of them.

Depreciation vs. Equipment Replacement Costs – Depreciation is an accounting term.  The government allows the owner to write off a percentage of the expenses each year.  However, depreciation deals with the past cost of the equipment.   Equipment replacement costs estimate the future costs of replacing equipment and then builds that future cost into today’s pricing so that replacement equipment can be paid for with cash.  Equipment replacement costs will always be 20-50% higher than depreciation.

How Loan Payments Are Handled – Let’s assume a $500/month loan payment is made up of $100 interest and $400 principle.  The government only allows the $100 interest to show up as an expense in your P&L statement. However, the full $500 flowed out of your company and needs to be considered when setting proper hourly rates.

I am literally on a plane heading home from a client’s business that just experienced the very phenomenon we are talking about above.  His last twelve-month P&L statement showed a net profit of $109,000 which they will have to pay taxes on. However, when we subtracted out the principle portion of his loan payments and the difference in depreciation and equipment replacement costs his “real” net profit was really a loss of $81,000.  These are huge costs of doing business that literally will never show up in a standard accounting P&L statement….but are critical to your company from a cash flow standpoint.  Be sure you include these two costs of doing business in your process of setting profitable hourly rates.

  • Review Your P&L Statement with Your Accountant Each Month – There are accountants and then there are accountants that understand business.  If you are able to find an accountant that understands business (and they are a rare breed and hard to find) pay whatever they charge with joy!  They will make you money not cost you money.  When you find that person, have a set time to meet with them each month to go over the previous months financials.  An accountant that really understands business will question items every time they review your numbers and will offer practical suggestions on how to increase your overall profitability.

Remember, your accounting system should be helping you run your company more efficiently and profitability.  Utilizing some of the above suggestions will help you better understand what is really going on within your company.

Stop Paying Sick, Vacation and Holiday Time

By Tom Grandy

You want us to stop paying sick, vacation and holiday time?  Are you nuts!  We would have a revolt on our hands.  Well, hear me out.  Holidays are expected, right?  Vacation is earned, correct?  Sick days are abused, right?  When an employee wants to take a day for hunting, fishing or to visit a sick friend, what happens?  They call in and take a “sick” day.  When sick days are gone the request switches to asking to take a vacation day.  You know the drill because it happens on a pretty regular basis.  The company didn’t just miss a day of work but the worker often has to lie to get the time off.  He or she wanted to go here or there so they used a sick day, right?

What’s the solution?  Combine all sick, vacation and holidays into what you now call Personal Days.  The company policy is that Personal Days can be used any time, for any reason.  If they want to use them for vacation, great.  If they want a day off for no reason, go!  When personal days are created employees tend to manage their time better.  They don’t have to lie about what they are doing and when the personal days are gone…they’re gone.

If you choose to, you can have a company policy that any Personal Days not used at the end of the year may be turned in for cash.  That just might be enough incentive for a tech to show up to work when they might have otherwise stayed home.  It has worked for others…it might work for you.  Give it a try.

Ready to Launch?

by Dave Ramsey

As a guy who literally began his company on a card table in his living room, I have a special fondness and respect for others who want to start a business. Owning and running a small business is 24/7 hard work. It’s a roller coaster ride full of highs and lows, so you’d better love what you’re doing.

Many of today’s most successful business owners began with nothing more than an idea, a little cash, and an extraordinary work ethic and desire to succeed. Today, I’m here to give you a head start on those guys.

Business plans and mission statements
Once you have a marketable idea, some cash, and (hopefully) the wisdom to start slowly with no debt, you need to develop a detailed business plan and mission statement.

When putting together a business plan, conduct plenty of research on your industry and the competition. Make sure you come away with the ability to confidently answer any question about your business, and how you plan to address downturns and upswings in the economy.

When it comes to a mission statement, ask yourself what you hope to accomplish with your business. Stay straightforward, simple, and powerful. The people who read or hear this statement should come away knowing exactly what you’re all about.

Trends and tracking
Remember the planning and research I mentioned earlier? It never ends.

A smart business owner is always talking to people within, and those connected to, his or her industry. Keeping track of developments and trends in the marketplace will help provide a good idea of what’s coming next.

Don’t forget Uncle Sam
You know the old saying about death and taxes? Hopefully, your new business won’t be the death of you, but taxes are a certain and important part of the small business equation.

There’s no need to worry about incorporating, or even setting up an LLC, when you’re still in the planning stages. There’s always time for that when you start making some money. Until then, just focus on solid, basic accounting techniques. Later, if you take home any business profits, plan to set aside 25 percent in a small account designated specifically for taxes.

Pastor Charles Swindoll once said, “The difference between something good and something great is attention to detail.” By paying attention to the details of your business from the very beginning, you automatically increase your probability of success!

Increase Your Rates for Profit

By Tom Grandy

It’s a simple process to increase your profitability immediately!  We are going to “assume” you are on a flat rate pricing system.  Your internal hourly rate is $140/hour which yields a 15% net profit or a profit of $21.00/hour.  Let’s assume you have two service techs that bill out 50% of their time or roughly 1,000 hours per year.  By doing some simple math we find out our projected profit per year is $42,000 ($21.00/profit per hour x 1000 billed hours per tech X two service techs = $42,000).  This calculation obviously does not consider parts, sales, and the corresponding markup.

Want to make a bit more money?  If so, bump your hourly rate by $10.00/hour.  If you are on mobile devices like a laptop on smart phone, the formula gets changed at night and the next day the change is in place with no additional investment.  The added $10.00/billed hour is all net profit.

What just happened to your projected net profit?  Over night the net profit jumped from $42,000/year to $62,000/year.  If it’s a one-hour call do you really think the customer in going to complain (or even notice) an additional $10.00.  Absolutely not.

If there are no complaints after a week or two jump it again.  You can always drop back down but think of what the company could do with an “extra” $20,000 to $40,000 in profit.  Pipe dream a bit.  What new equipment could be purchased, tech bonuses paid at the end of each month or year, additional benefits, etc.?  As they used to say in the old TV commercials “Try it, you’ll like it!”

Praise and Raise

by Dave Ramsey

We don’t give out raises based on longevity at Ramsey Solutions. In my book, the simple fact that you’ve been breathing air in the same office building for a year doesn’t qualify you for a salary increase.

However, if you’ve brought value to the company, if you’ve proven yourself to be a hard-working and consistent contributor, you bet you’re going to be rewarded! Even now, after more than two decades of running my own business, I love how a team member’s face will light up when they hear they’re getting a raise.

Your team is probably stocked with players holding varying degrees of talent, tenure, and maturity. At some point during their careers, every one of them is going to have a moment when they feel they’re worth more than the numbers on their paycheck. Some of these team members will be right, and they’ll deserve to be rewarded generously. Others, however, may have an unrealistic view of what they’ve brought to the table.

As a leader you have an obligation to provide your team with everything they need to succeed. That’s why I’ve rarely cut a team member’s pay due to poor performance. People are more than figures on your bottom line, or statistics in a weekly report. Sometimes, if a team member is underperforming, additional training is warranted. Other times, someone may be battling personal issues outside work. This happens to all of us, and a good leader will realize when a little grace and understanding are needed.

But for the players who are consistent contributors year-in and year-out, raises should be given happily and with a praise sandwich. Praise the person’s actions and talents, give the raise, then praise the person some more. These moments are times for celebration, because they’re win-win scenarios. The company wins because it has a truly valued and productive team member. And the player wins because they see — in a tangible way — they’re valued, respected, and appreciated!

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