Mark:Today on PowerTips Unscripted. We talked to Doug Howard, senior consultant of Remodelers Advantage. Good organizations make decisions based on financial information. Great organizations have a formal month end close process to be sure that financials are done, reviewed, corrected, and ready for leaders and managers to make decisions. Doug is here to cover what that looks like and how to put such a process in place.
 
Mark:And we’ll hear all about it in just a minute.
 
Victoria:Hi, I’m Victoria Downing, and welcome to PowerTips Unscripted, where we talk about tips, tactics and techniques to help you build a strong, profitable remodeling company. And I’m here with my co-host, Mark Harari. Hello. Hey, let’s got a little off to a rough start there. Hopefully our listeners can’t tell. But we’ve got a great topic today. As a matter of fact, it was a topic that I was just discussing with our office manager, our awesome office manager, Tabitha, just moments ago.
 
Mark:Well, that’s good timing.
 
Victoria:You know, I love the numbers. Now, I don’t necessarily love putting them all together, but I love looking at the reports and using them to figure out where we are in the company. That part is exciting. Yeah. Yeah. Whether it’s good or bad or indifferent, it tells me something, right?
 
Mark:It tells the.
 
Victoria:Story. Yeah, it tells the story. So today we get to talk a lot about that. Shall I dive in?
 
Mark:Jump away.
 
Victoria:Today we have with us our guest, Doug Howard, senior consultant at Remodelers Advantage. Doug’s been with us for going on seven years now and is a popular consult, as well as a round table facilitator for our entire community of Roundtable members and more. So we’re excited today to have him here to talk about the months and closing process.
 
Victoria:Hey. Welcome, Doug.
 
Doug:Thanks for having me, I’m sure.
 
Victoria:Yeah, we’re always fun having. Yeah. I think this is about your fifth, sixth appearance here on the podcast.
 
Doug:And I love the enthusiasm you’re showing for a topic like month. And you.
 
Victoria:Said, well, the fact that I don’t have to do it is really a plus for me. I’m at that level. Like Mark said in the introduction, I’m one of the leaders managers. You just want the information to be able to, you know, manage with it. So, so all right, so let’s jump in. What is involved in a good month and, process.
 
Doug:Well, I think, you know, it really all starts with some sort of a schedule, some sort of a process to really make sure that we’ve got all the information. We get it in a timely fashion. We understand who’s responsible for generating what. And then it kind of all finds its way usually to the accounting department or an accounting manager that then knows all the pieces are there.
 
Doug:And then they’re putting it all together. An ideally. And this is why we talk about that really that month end deadline and scheduling and that kind of thing is it all has to line up for the same period of time. And that’s where a lot of people just have a lot of difficulty.
 
Victoria:How do you mean?
 
Doug:Well, like, you know, when we look at the month end process, right, we want to see, our bank reconciliations, our credit card reconciliations. Remodeling companies are going to want to see their statements from the lumber yards and other vendors. They’re also going to want to see, the project, update information like the whip reports and those kinds of things.
 
Doug:And a lot of times they’re taking those things at the end of the month, but there’s a period of time when things are flowing in and they don’t all line up at being as of the last day of the month. Right? So we have a lot of people out there that are looking at a whip report, and then they give it over to accounting and then some more invoices come in and one piece gets updated and the other doesn’t.
 
Doug:And there’s a discrepancy. And those things aren’t telling the same story, because one of the challenges with accounting is when you have 3 or 4 different areas where you’re getting inputs. We definitely want to tell a story about the business, but we want it to tell one story about.
 
Victoria:The right, right, one accurate, simple story.
 
Doug:Right?
 
Mark:So far in a quick question, but how far into the following months? I mean, the end of month close doesn’t do any good if it’s four months later, right?
 
Doug:No. Exactly. Yeah. So, I mean, ideally, I think you want to be within 10 to 15 days into the next month. You know, now for some folks that’s a little bit challenging depending on when they have things cut off. But a lot of people don’t even realize they can change the cutoff date for their bank statements or credit cards, even sometimes their vendors, so that they line up.
 
Doug:But also a big part of it is giving deadlines to, getting invoices from trade contractors and, you know, that kind of information because, you know, if an invoice comes in three months later, it couldn’t possibly have been in the information that we were looking at at the end of the month.
 
Victoria:So if you’re letting it flow a little bit, 10 to 15 days into that next month, when is a reasonable time to expect or when is a reasonable date to expect those reports to be ready for management?
 
Doug:Yeah. So usually what happens is you get everybody on the same page that everything is as of the last day of the prior month, right. So certain things are going to take 3 or 4 days to get, some things maybe take, you know, 8 or 10 days, but we get everybody to agree on a date that by this time I should have whatever I need to do last month’s work.
 
Doug:And so let’s say it’s the 12th or so, and then I’ve got a couple of days to put the financials together. I think really it should be before the business owner or whoever’s going to review it by about the 15th of the month. I think that’s doable, but that’s really not the last step. A lot of times the accounting department will get it as far as they can, and they’ll give it to the business owner.
 
Doug:But there really is a feedback loop that has to happen to say, well, that doesn’t look right, or that could possibly be or I don’t think you ran an 87% gross profit margin this month since it was 13% last month.
 
Victoria:Yes, absolutely.
 
Doug:And all those things, as we know, come down to the timing of things, right. And so, you know, when an invoice kind of goes into the next month, whether it’s in an invoice, the money coming in or something that we’re paying going out, just the timing of something falling into the next month creates that effect. That roller coaster.
 
Victoria:Ride.
 
Doug:I made a bunch of money this month. I lost a bunch of money. And what that does is it really, kind of, numbs people from reacting to the information in front of them because they know it’s not necessarily correct in the market.
 
Victoria:Right?
 
Doug:So.
 
Mark:Well, so, Doug, you just said something, that perked my ears about, well, last month was 13% gross profit. How can we be 87% gross profit this month? That’s obviously not correct. Right. So, to to expand on that, how should you review it to know the correct.
 
Doug:Well, I think the first thing we do is we want to really have a good set of like parameters for the accounting team, right. So if we’re if we’re pricing to get, say, a 32% gross profit margin, we may see something in the 25 to 40% range. There could be some variation, but we’re probably not going to see four.
 
Doug:And we’re probably not going to see 64, right. And we should never see gross profits that are negative. I think people that sometimes will send me financials and say, no, these are right. I’ve checked them and we had a -$250,000 gross profit last month, and we lost $1 million. And I’m like, well, I’m going to guess you’d be out of business if that were remotely true.
 
Doug:So the first thing we do is to say, okay, well, we want to create a range and then we want to create. What do you check when things are out of that range. Right. What do you go back to. So one of the things that I like to look at, particularly with the whip report, is the difference between one report with report and the next should tie in to what’s on the profit loss.
 
Doug:Right. So if I have all my jobs and my total invoiced at the end of May was $1 million, and at the end of June, it’s 1,000,002, then I should have $200,000 of income on the profit loss. So when we line those things up and teach people how to check them, they may not even always know what’s wrong, but they should know if they’re.
 
Mark:And just really quick because not all of our listeners are Roundtable’s members. Could you just really quickly describe and explain the whip report?
 
Doug:Sure. So the whip report is the way we look at how much money has been spent on a job from which we determine how much of the job is done, and then based on the percentage of the job that’s done, that’s all the revenue that we recognize. So if we’ve collected more or less, we adjust for it because it’s not about how the money flows.
 
Doug:I mean, some people will get a good sized deposit and have a draw schedule where they get a lot of money up front. They may not have even started the job yet, but we try the we we tie in with the whip report. What percentage of the cost of we expended. If it’s 30% of the job has been spent, then we recognize 30% of the income.
 
Doug:And what that does is it keeps the revenue in the cost in the same range with each other. And that’s why we shouldn’t see fluctuations and it should get away from that roller coaster, effect of a really profitable month and that are really losing, so.
 
Mark:That’s, that’s really great. And just to for anyone that doesn’t know, Whip stands for Work in progress.
 
Doug:Yeah.
 
Victoria:So how should that review be done? Because what happens here is just what you described. Tabitha gets the reports pretty much done as far as she could tell. Handsome to me. I start reviewing. I find five things that just don’t look right. I highlight them, send it back to her. Ideally it would be correct when I get them, but, so I’m trying to figure out, you know, how do people review internally before that goes to their leader or manager?
 
Victoria:They’re still going to look, but it seems like they should be pretty darn accurate by that time.
 
Doug:Absolutely. So if we come up with a checklist and we just did this with a client about two weeks ago, we came up with a pretty extensive checklist for your financials are done. You think you’re ready to turn them over. These are the 8 or 10 things to check. And we’re to double check verify each one of those numbers.
 
Doug:Now if you’ve done that and something still looks out of whack then you know that’s one issue. If you’ve done that and you think they look good and then you pass them on and someone knows that something’s just not looking correct because of, you know, something they know about the way the business operation, we had a good month, we had a slump, whatever.
 
Doug:Then that’s important. So what we like to do is have the accounting department have a checklist that they literally sign off on. They checked, I checked, I checked, and here’s my signature. But then I like to go to the owner, whoever’s responsible for the financials and show them how to review the financials. They should be reviewing them for more than just accuracy.
 
Doug:I always tell people the accounting information should tell us three things, right? It should tell us what happened, what does it mean, and what are we going to do about it. Right. Until we ask them to look at it. Because if we’re not making sense out of it, if it’s not actionable, then it’s fine for getting our taxes done and getting a bank loan or something.
 
Doug:But it’s not a management tool, right? Right. And then when the owner goes through it and checks, I want that form to go back to the accounting office to say, yep, we got it right. Or here’s 2 or 3 things that need to be adjusted. And then when they bring back the revised, we all sign off on. Because I tell people, you know, when we go back and look at May financials or we’re trying to figure something out from two months ago or whatever it is, it is so important to make sure we’re looking at the actual version of the financials that are the, you know, the ones that we believe are correct.
 
Doug:Sometimes there are so many different versions or different reports run on different days that I was like, we want to basically like ring a bell or, you know, bang a gong or something that says these are financials that we can make decisions for. Okay. And I’m sure you’ve seen this. Well both of you, I’m sure you’ve seen it when you ask someone for their most recent financial.
 
Doug:Yeah. And if today’s the 28th of the month or 29th or the month they send you through the 28th of the month.
 
Victoria:Right, right.
 
Doug:And it says no idea what’s in there or not in there. And then sort of this and really what everybody should be working from is the last completed, reconciled, approved set of financials.
 
Victoria:Absolutely. Yes.
 
Doug:But it’s, it’s, it’s basically declaring that that event has happened once a month and giving it the importance it deserves. Yes. That I think is really important. And frankly, sometimes we have some really good accounting departments that are doing a really good job. And the piece that’s missing is the owner taking it and digesting it and giving feedback.
 
Victoria:Right.
 
Doug:Because most most of the times it’s not something that, you know, they like doing, you know.
 
Victoria:Yeah, right.
 
Doug:Information. But they don’t, you know, the accounting process is not, why most people went into construction.
 
Victoria:Right, exactly. So in a remodeling company, who all do you think should be involved in checking these things and looking at them and providing the information and so on?
 
Doug:Yeah. So I think whoever is leading the responsibility for job, profitability project manager, production manager should be providing the information on the jobs themselves. So verifying change orders, looking at, you know, cost to complete that kind of information, that information should find its way, to the account. We have some production departments that do the work themselves and then give it to accounting.
 
Doug:And I find that that’s a real disconnect they need to have they need to be communicating. They need to be having a conversation. If we just take what they say at face value and something doesn’t look correct, it doesn’t give that accounting person much of a trail to go back to you other than just going back to the project.
 
Victoria:Right? Right. Okay.
 
Doug:And then the accounting person, should be in there as well. And, you know, depending on, the size of the company and who’s involved in what, you know, sometimes somebody else is going to have knowledge of things like, you know, maybe the estimating or what the job should look like. It’s not better to have them take a look at it, but usually it’s going to be someone in production, the accounting person, and then the the leadership or owner person that’s going to be responsible.
 
Victoria:Okay. All right. Great. You know you see a lot of our roundtable members when they first come to us as a little aside on this main topic, what are like the top three issues you see when you’re reviewing their financial reports?
 
Doug:Yeah. So I think one is that just it’s really not apples to apples in terms of what they’re putting into cost of goods sold. Right. We talk about what things should be above the line. So I love when I talk to somebody and they say, well what’s a good profit margin. And you know, he said, well there’s a range.
 
Doug:But you know, maybe given what you’ve told me about your business, about 30 to 35% and you’re like, oh, great, I’m already at 64%. It’s like, yeah, but you tell me you’re losing money right now. You’re at 64% because none of the job costs, like management and those kinds.
 
Victoria:Of forced labor.
 
Doug:Or labor. Yeah, you’re getting applied. So so that that is definitely, one the second thing is getting the timing of things into the right period. Right. And so I have some folks that have told me that, you know, right up until the time I do those financials, if someone turns in a June invoice in July, I’ll put it into my financials.
 
Doug:But it might not be on the whip at all because I’ve already gotten that information for production. Getting everybody to agree when we’re not putting anything else in the bucket, you know, is really, really important. And that’s a very common, mistake. And then I think the other thing is just really, some of the category issues that people use, you know, I mean, I know you look at a lot of chart of accounts.
 
Doug:To me, it’s always interesting to see the wide array of I have very, very few categories you couldn’t possibly tell me what’s going on or categories. It looks like my check register, not a financial statement. Right. Well, there’s too much to react to. Yeah. And I always tell people you want this thing to be actionable. You want to be able to say, okay, if that’s out of range, what am I doing about that?
 
Doug:And I think that that’s the hardest thing. But for a lot of folks, I don’t think they’re, they’re eagerly awaiting to get those results. Or even when they do things like budgeting, you know, you say, well, what do you want your budget for next year? Oh, 3 million at 28%. Well, that’s that’s the first two lines. So that’s great.
 
Victoria:Yeah.
 
Doug:That’s not your whole budget.
 
Victoria:Right.
 
Doug:Okay. And then I guess the other thing you ask for three I’ll give you four. But anything on the balance sheet is like like a mystery.
 
Victoria:I must say that was the most difficult thing for me to get my hands around. I still sort of think about a couple of those categories.
 
Doug:Well, it it’s funny, as soon as you equate it to anybody that’s ever filled out a net worth statement, they get it, get it right. And I always tell people like, if you can take a CAD design and build a house, I guarantee we can teach you how to navigate the eight numbers on the balance sheet. But is such a mental block?
 
Victoria:Yes, there is. Great.
 
Mark:Yeah. That’s great. I, I think it’s time for the lightning round. Are you ready?
 
Doug:Sure. Oh, and now here’s a reminders advantage. Lightning round. It’s a drop.
 
Mark:All right, here we go. Six questions and 60s. What’s your favorite business book and why?
 
Doug:My favorite business book is The Leaders Checklist by Michael. The same because it maps out 16 things that every leader should go through when they’re in their leadership.
 
Mark:If you weren’t a senior consultant here at Remodelers Advantage, what do you think you’d be doing?
 
Doug:Well, I just qualified for the astronaut program, so I would probably be a high school history teacher.
 
Mark:What are you not very good at?
 
Doug:Organization.
 
Mark:Name a movie you seen more than ten times.
 
Doug:Apollo 13.
 
Mark:What do you think is the greatest invention ever?
 
Doug:The traffic light.
 
Mark:What’s the first four letter word that comes to your mind?
 
Doug:Cash.
 
Victoria:Is there a good answer? That was awesome. This is great. Doug, thank you so much for sharing. Sharing your expertise in this. This I think it’s really important for people to understand how to review and use those financial statements. So great topic for today. But before I let you go, I want you to share with our listening audience your five words of wisdom and why they resonate with you.
 
Doug:Sure. So for this topic, my five words of wisdom are don’t ignore the weather report, right? I always tell people when you’re a pilot and you get instrument rated, you know you get a lot of information, including, you know, the weather conditions and that kind of thing. And in most cases, the weather conditions aren’t going to cause you not to fly unless they’re really extreme, but they’re going to change the way you fly.
 
Doug:They’re going to change the things you do, and you’re going to react to the data that’s in front of you. And when business owners are going through challenges, it’s really easy. Or if the numbers kind of bounce around, it’s really easy to say, well, on average I’m doing, you know, this. And imagine if you took a six month average of your wind speed and tried to calculate how you should fly, right?
 
Doug:What a disaster that would be. But we don’t want to get obsessed by them, but we also don’t want to we know.
 
Victoria:Yep, yep that’s great.
 
Mark:And Doug, you don’t you have a podcast as well.
 
Doug:Yeah. Well we do a podcast called Selling the Dream for people that want to sell their businesses.
 
Mark:There you go. So if you’re ready to sell, check out the podcast.
 
Victoria:And lastly, Doug, if, say, people want to reach out to you to talk to you about how you help Remodelers prosper.
 
Doug:Yeah. Doug and Remodelers advantage.com. And, I always tell people I have, you know, I protect my personal time very closely. So you can’t get me between 2 a.m. and 4 a.m.. Those two are. Other than that, I’m pretty available right?
 
Victoria:Right. Thank you so much. This is awesome.
 
Doug:All right. Thanks for having me.
 
Victoria:Well, that was really. Well, that was really interesting. You know, I, I think so I’m, I believe so strongly in the importance of understanding your numbers and, and making sure they’re accurate. That’s something that I spend a lot of time on. But I thought that was some really good insights there. I’m going to change our process because of that.
 
Mark:Well, I will say that, you know, when I saw that this was the topic for today, I wanted to just shoot yourself. But Doug makes it fun. He’s got a lot of energy. And I was stayed awake the entire time. So that’s a plus, right? So, yeah, it was it was very informative and great. It’s it’s it’s something that’s a tough topic for some people.
 
Victoria:Yes. But again, you know, I think one of the reasons Doug is such a popular consultant and facilitator is because he does make it fun and it’s, it’s absorbable and you end up with actionable stuff.
 
Mark:Or as I call him, captain analogy.
 
Victoria:Yeah, really.
 
Mark:He has a great way of framing it in in an eggless and bagless and bagless analog.
 
Victoria:It’s easy for you to say, all right.
 
Mark:So let’s let’s just end that on that. Well, we want to thank Doug for sharing all these insights on your end of month close, and we want to thank you for listening week in and week out, I’m Mark Harari.
 
Victoria:And I’m Victoria Downing. See you next time.