Have you ever said “I know I should understand my financials but they just don’t interest me?” Have you even thought it? Admit it, probably! Owners of most remodeling companies came from design or production backgrounds, few from accounting.
In fact the simple term “job cost accounting” recently caused looks of disdain and disgust among the TSA team where I was briefly detained on my way to Dallas. They asked what made my suitcase so heavy: job cost accounting books, I said. Then they laughed at me and said “ick!” True story!
Regardless of whether you’re a member of the Remodelers Advantage Roundtables or simply receive Power Tips in your inbox weekly, it’s time to take the 2016 Challenge: get your finances and job costs in order and reap the rewards!
Here’s what “in order” means:
Balance Sheet clean and pretty:
- No unexplained negative balances;
- Cash accounts reconciled with no outstanding checks or deposits prior to 30 days;
- Credit card accounts reconciled to last statement dates with no outstanding charges or payments prior to statement date;
- All Shareholder loans moved out of Current Assets into Other Assets;
- Accounts Receivable and Accounts Payable aging reviewing for balances older than 60 days;
- Payroll liabilities reconciled
- Long-term notes payable reconciled to year end statement for principal and interest charges
- Equity balances reflecting only current year transactions.
Profit/Loss (aka Income Statement) clean and pretty
Gross Profit line:
- All income from client contracts: no insurance dividends, rent income or “miscellaneous” income not related to client contracts
- Over/Under Billings for all jobs open at year end (over $15,000 and/or 6 weeks in duration)
- All job costs in COGS, none in overhead: all materials/trade contract/equipment used on jobs and labor including burden included in COGS and associated with jobs
- All expenses related to running the company, as opposed to running jobs
- All owner salary and distributions included in overhead – journalize out the distributions at year end for tax purposes
- Any income/receipts or expenses NOT related to client contracts or running the company in the current year
That’s the first part of the challenge: you can do this, probably by the middle of February. Now you’ll have a very good baseline from which to begin 2016.
Here’s the next part of the challenge and the most important part: learn to understand what they mean. Start with job costs: review estimated to actual with every payroll or at least twice a month. Monthly review and question the balance sheet and the profit/loss – they go hand in hand. One can’t be correct without the other’s accuracy.
If you don’t’ understand something – ASK! Ask your bookkeeper, who should definitely know the answer, ask your CPA, ask members of your local NARI or NHBA, ask me, ask the Googleweb.
The point is – in 3 months you have accomplished the following:
- Got 2015 books – including job costs – accurate;
- Know how to keep 2016 books in the same state;
- Begun to understand the reports;
- Be able to manage the company based on what you see in them; and finally
- FEEL GOOD ABOUT YOURSELF!