Grandy

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!

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.