Cash Flow vs. Accounting 

Many businesses rely on their P&L to gauge how well their business is doing, but that’s a bad idea. While there’s a place in your business for your P&L statement, it’s not in running your contracting business on a day-to-day basis. Your P&L will lie to you every day of the week because it’ll tell you you’re making money, even if you’re not.

If you really want to know what’s happening in your business, then you need to know the differences between cash flow and accounting. Let’s examine them. 

The Two Big Differences 

As a business owner, there are two basic differences between cash flow and accounting that you should know.

Difference #1: Depreciation vs. Equipment Replacement Costs 

The first major difference is depreciation versus equipment replacement costs, and what that means for your business. Depreciation has to do with accounting. It relates to what you pay for a piece of equipment from one year, two years, even three years ago. Depreciation is exclusively an accounting number that provides information on the reduction in the value of an asset over time since its first purchase. It does not actually have any direct cash impact. Equipment purchase, on the other hand, is tied to cash flow since your business has to spend money in order to get an asset replaced. This purchase has a direct cash impact, whereas depreciation does not. 

Difference #2: Loan Payment Numbers 

The second major difference is how loan payments are handled. If you have a $500 monthly loan payment and of that $500, $100 is going toward the interest and $400 is going toward principal, what shows up on your P&L statement? It’s not the entire $500; it’s only the $100 in interest. Right there, you’re dramatically under-reporting the expenses in what it costs you to run your business. If the $400 isn’t an expense, it shouldn’t be showing up on your P&L statement. 

Making Sense of It All

If you want to know the truth about how your business is doing, you can’t just look at your P&L statement and expect it to be true. You have to know the difference between cash flow and accounting, and run your business accordingly. Accounting and cash flow numbers show up completely different. And while your first instinct may be to assume that there’s a discrepancy, that’s not necessarily the case. Differing values for accounting and cash flow do not automatically mean that one is correct while the other is wrong. It simply means that the two are calculated differently, and knowing this difference can help you analyze your business’s financial performance and the flow of expenses better. 

Know How Well Your Business Is Doing! 

Ultimately, knowing as much as you can about your business’s finances enables you to make smart decisions so you can grow your contractor business. If you’re asking yourself, “How can I grow my contractor business?”, you can start today by watching our free webinar!

5 Things Your Business Should Review Monthly 

Running a successful business takes more than just the provision of quality services; it also takes efficient management and organizational skills.

Whether you own a large-scale business or a small startup, you’ll constantly find yourself having to deal with tons of data and financial statistics. Once you get the information, you’ll have to make sense of it all to verify that your business is profitable.

Analyzing data and financial reports every month is an important part of running a successful effectively, no matter the size or the scope. A comprehensive analysis of this data provides key insights relating to your business’s performance within the market in comparison to its competitors. It also alerts you to its financial state and other strengths and weaknesses that may impact future performance significantly.

Let’s take a look at the 5 things your business should review monthly. 

The Big 5 

1. P & L Statement 

The first thing you need to review is your P&L (profit and loss) statement, also commonly referred to as your income statement. This statement gives you a comprehensive overview of your company’s total revenue and expenses incurred during the month. It provides insight into the net income gained or lost by your company so you can have accurate data and determine the overall profitability of your business. When you review your P&L statement at the end of each month, check whether any accidental errors have been made or if something has been overlooked to avoid any future hassle. 

2. Balance Sheet 

Your balance sheet lists your business’s assets, liabilities, and owner equity. Your balance sheet can easily show you the scope, organization, and direction of your business’s financial health, all in one place. When you review it every month, you should understand exactly what it’s telling you. During your review, if you notice there are significant changes that don’t make sense, get an answer to it — fast. The more time you put into your balance sheet, the more helpful information you’ll be able to glean from it, which is crucial if you’re hoping to grow your business in the future. Your balance sheet should always be in balance. 

3. Payables Report 

Running a business also means paying bills and keeping track of credit expenditures. Your payables report should represent all your cash expenditures while also letting you know who you owe money to at a glance. There are many contractor business growth strategies that you can use to your benefit, but it all starts with tasks like monitoring your payables report. Stay current with all your suppliers and review the payables report at the end of each month, and keep your payables report in the first three columns, maximum.

4. Receivables Report

It’s pretty difficult to keep your payables current if your customers aren’t paying you. That’s why you have to review your receivables report every month. Your receivables report indicates unpaid invoice balances and the duration for which they’ve been outstanding. This report, which should be kept in the first two columns at most, lets you identify invoices that are open and helps you zero in on slow-paying clients. Reviewing this report each month will allow you to keep track of all the money you are owed so you can get paid and keep running your business. 

5. Hill and Valley Account 

Budgeting as a business owner is hard enough as it is. With a hill and valley account (your business’s savings account), you can get through even the hardest months of income fluctuation. Every month, you should review your hill and valley account, checking that it’s sufficient in terms of getting you through tough financial periods your business may face in the future. Having this money in tough times can help your business survive and keep you in good financial standing overall. 

Focus On Long-Term Success! 

Businesses that stand the test of time show a remarkable tendency toward effective finance management. If you want to focus on long-term success, then you need to review the principal pieces of your business’s financial information every month. Knowing how to run your business starts with spending the time and money to invest in yourself and your business from the start. At Grandy & Associates, we offer contractor business training and contractor business growth strategies to help you build a more profitable business. 

Change the course of your business and start learning the art of business management today by attending our free webinar or signing up for our monthly business tips email newsletter.

Grandy & Associates Introduces New Brand and Website

Teaching contractors profitable business strategies since 1987

Green Bay, WI, May 30, 2019 — Grandy & Associates, in the business of teaching contractors and business owners profitable business strategies since 1987, announced today the launch of a new corporate brand identity. The organization announced an evolved brand, including logo and design elements coinciding with the launch of a new website.

Grandy contributes continued growth and success to the fact that they “truly care about helping clients succeed and run profitable businesses.” Since launching in 1987 in Owensboro, KY, Grandy has trained over 20,000 contractors to model their companies to maximum profitability through interactive, online and in-person workshops.

“Over the past 30+ years, we’ve built a strong reputation for helping contractors all over the country by providing people with the tools and knowledge needed to run a successful business in this ever-evolving economy. What keeps us going each day is knowing that we’re helping people not only run profitable businesses and have well-trained employees, but also to see them be able to provide a good living where their families flourish too.” says Bill Kinnard, President & CEO.

Overall, the new Grandy & Associates brand identity speaks to the building blocks needed to understand and successfully run a profitable business, as well as the simplicity and integrity Grandy brings to the table when working alongside each client.

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.

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