By Tom Grandy, Founder
Who did you call last time you had a question about your P/L statement? The vast majority of contractors called their CPAs. Now I am not against having a CPA, as a matter of fact, I fully support having one. Your CPA should be reviewing your numbers every month and offering suggestions on how to increase your profitability.
The point of this article, however, centers around “who” is inputting your numbers into QuickBooks or whatever accounting software you use. Many companies, especially smaller ones, have their CPA enter the data. Granted, it’s easier and one less thing the owner has to worry about. However, your CPA or outside bookkeeper doesn’t know your business. Outside people track what they want to be tracked, not necessarily what you want to be tracked. CPAs want income and expenses tracked for tax purposes. The owner, however, may need numbers tracked in a completely different way when it comes to running the company. The ideal situation is to have someone inside the office enter the daily deposits and expenses. If there is a question in terms of what category to put it in it can be quickly clarified by asking a couple of questions from office staff.
When the owner wants to review the P/L Statement to see how things are going (no matter what time of month it may be) all the data will have been entered. Phone calls to the CPA are not necessary and there is no waiting till well after the end of the month to be able to review the numbers.
Over the past 30+ years, I have worked one-on-one with contractors in every trade. The basis of the modeling process centers around creating a budget to produce profitable hourly rates. That budget information normally comes from the company’s P/L Statement. Owners are often amazed at several things when reviewing their P/L statement.
· Wrong Categories - Things are routinely put in the wrong categories. When the details are viewed, in terms of what makes up the total expenses within the category, items are often found that were placed in the wrong category. Also, items on the P/L Statement often appear in a subcategory called “Other”. What that means is that the expense was put in a category that did not exist, so QuickBooks puts it in “other”.
· Not Enough Subcategories – Categories are routinely created like Marketing and Insurance with no breakdowns or subcategories. Marketing should be tracked by the type of marketing (social media, print, radio, TV, etc.). Utilities need to be broken down into electricity, water, gas, and trash pickup. The same philosophy goes for other categories in the company’s Chart of Accounts.
· Income Bunched Together – Nearly every company has at least two departments, service and installation. Depending on the company lots of other income categories may also exist like commercial and/or industrial work. Even the basic areas of service and installation may break down into residential, light commercial, commercial, industrial, and/or maintenance agreements. When all income is thrown into one category called Income, the owner or manager has no idea how each area is doing. Are sales in individual departments increasing or decreasing? Who knows!
· Cost of Goods – Wow, over my lifetime of reviewing contractor’s P/L Statements I have seldom seen the Cost of Goods broken down via departments like were mentioned above. Every department has different percentage markups on their equipment and parts. Without separating the Cost of Goods by department there is no way to estimate how many markup dollars can be used to determine proper hourly rates.
Every company, large or small, needs to create a budget. That budget needs to be reviewed monthly to determine if income and expenses are in line or not. If not, why? The more detail the owner has available the better understanding he or she will have when profitability is reviewed. Take marketing for instance. Maybe the budget for Marketing is $25,000. The owner notes it is $3,500 over budget. Why? If it’s all lumped together in one category it will take some digging to find the answer. However, if there are subcategories within the Marketing area (social media, print, radio, TV, etc.) pinpointing what areas are out of line can quickly be isolated.
Inputting data inside the office will allow income and expenses to be more easily tracked. Remember, the most profitable companies are run by individuals that understand the “business side” of their business!
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