Judith Miller’s Top 4 Accounting Resolutions for 2018

Happy New Year!

Although I typically don’t make New Year’s resolutions, I want you to make some; these are all guaranteed to make your life better by improving your remodeling business and by making your financials for December more accurate.

AND, even better, the numbers you enter for your Roundtables Spring Focus Packet (due February 23rd) will be real “purty”… as we say in accounting lingo.

I’ll try to keep the list short:

  1. Make sure your December 2017 WIP is right: this is vital to the accuracy of 2018 gross profit calculations. Download the 2018 WIP Workbook and get started now. Remember to enter all the invoices for work done in December with a December date so that the WIP calculation calculates true earned revenue for December based on those expenses.
  2. Clean up the Balance Sheet for December 2017 to start 2018 with a good baseline from which to measure changes in equity.
  3. Be sure ALL job costs are posted to COGS accounts – not overhead.
  4. Calculate your TRUE burdened labor – to be used both for estimating and for job costing – for all employees as of 1/1/18. Download the REVISED Labor Burden Calculator. And don’t miss the FREE webinar I will be presenting on this vital piece of the job-costing puzzle in February.

 

Help is Here

Contact me if you need help – I’d love to get your numbers “purty” for the Spring RA Roundtablse meetings.

Financial Data Analysis You Can Use Right Now!

You’re probably sitting around thinking “Now that the year’s over what would Judith do with all this information?” Today’s your lucky day because I’ve been thinking the very same thing: after tidying up your Balance Sheet here are useful analysis you can do with year-end information.

But FIRST, make sure your Balance Sheet accounts are 100% accurate: all the way from checking to equity.

That means:

  • No unexplained open checks or deposits older than 30 days. – same with credit cards;
  • AR aging only showing client invoices you will collect;
  • Same with AP – only invoices you intend to pay;
  • Payroll liabilities tied into 4th Quarter PR tax reports;
  • Workers comp and general liability balances are reasonable;
  • and Retained Earnings accounts tied out to the 2015 tax return.

Only then you can dig into the Profit/Loss statement, because when the Balance Sheet is accurate the Profit/Loss is correct TO THE PENNY (even though there might be some mis-postings).

So now that you’re on the P&L Statement, you’ll want to:

  • Compare the gross margin on the Profit/Loss statement (less WIP) to that from the Job Cost Reports – they should be within 2% (plus or minus);
  • Compare the Gross Margin Percent on the Profit/Loss statement (including WIP) to that on the WIP Final GP% – again they should be within 2%, plus or minus;

Now for a really useful analysis: compare your estimated labor rate to that shown in your job cost reports. This will probably take some digging. From Quickbooks, Job Profitability Summary which is used to compare the GP%, Customize/Filter/Transaction Type should equal Paycheck and then double click on any large dollar job.

Here you’ll be taken into the detail of the numbers. Be sure to Customize Columns and add “Source Name” and “Qty” so you can see the employee and the number of hours.

Choose one paycheck and add up all the costs, divide by the number of hours shown on the first line and VOILA! You’ll have calculated the average labor cost actually hitting the job.

If this is different by more than 2% (again + or -) then you’ll have to do some more work! Download the Labor Burden Calculator from the RemodelersUniversity.com member’s resource library to determine how much field-employees really cost and compare that number to the estimated labor rate and the actual you’ve just figured.

And some other great tools in Calculator section of RemodelersUniversity.com is the Growth Sustainability Calculator as well as the Critical Ratios Tool. Now that your numbers are clean and pretty USE THEM to make 2017 one of your BEST YEARS EVER!

Happy New Year – be safe, work hard and enjoy yourself!

The Top 5 Accounting Issues Remodelers Face

I’m just returning from Remodeling Excellence week in Kansas City where I not only facilitated two fantastic Remodelers Advantage Roundtables groups, but I also had several sessions during the week’s capstone event: The Remodelers Summit.

As usual, I heard some fascinating stories and learned more about some of the unique challenges Remodelers face. Unfortunately, I also heard an all too common complaint. One attendee said, in no uncertain terms, “to me, probably the least understood part of running a business is the accounting side.”

This always saddens me to hear. Especially since Remodelers Advantage has so many wonderful resources to help you learn the ins-and-outs of accounting.

But before I could comment, he asked: “What would you say are the top five issues that small contractors face when it comes to accounting?”

What an excellent question!

So good, in fact, that I couldn’t wait to share it with all our PowerTips readers.

So…without further adieu:

THE TOP 5 ACCOUNTING ISSUES REMODELERS FACE

#5. Paying the position too little, and not respecting the position enough. The attitude “oh, my girl does that, I don’t touch it” is still too pervasive in young (and some old) companies.

#4. Failing to tie job costing into project management culture. Too many field people have no idea what the accounting/bookkeeping department does and why it matters. This can lead to less than stellar communications, the backbone of good decision making.

#3. Dismissing an annual company budget or not getting it entered into your system (QB or Sage) so that it can become a useful tool for protecting profit.

#2. Not understanding what makes up OVERHEAD as opposed to COGS, as well as not understanding the importance of having your gross profit from the financial statements tie into that of the job costs.

And, BY FAR, the number one accounting issue that remodelers face…

#1. Not believing you need to understand accounting and the related issue of not believing you need to understand your financial statements. Without understanding your financial statements, you have no ability to know if the person you have tasked with getting the information into a system is doing it right.

https://www.remodelersadvantage.com/events/master-your-remodeling-business-workshop/. Meet Judith LIVE at the Master Your Remodeling Business Workshop!  Learn More

Start 2016 Right: with an Accurate December WIP

You do want to know your gross margin every month in 2016 – right? That’s a critical metric to watch as it defines your sales success and production efficiency: raise your rates and your margin goes up, increase labor productivity and margin goes up. Good stuff!

Now, IF you want the very most accurate gross margin % every month in 2016 you have to start with an accurate WIP (aka over/under billings) in December. That’s because jobs open in December flow into the New Year bringing with them accumulated costs and invoices to date as well as accumulated over/under billing amounts. NO MATTER WHAT ANYONE SAYS you must carry those jobs forward into the New Year to get an accurate gross margin going forward.

NOW – it’s not any harder to do an accurate December WIP than any other month of the year – it’s just MORE IMPORTANT.

SO –here’s how:

1. Set up a QB or Sage Memorized Report titled “WIP Dec 2015”

2. From Reports/Jobs-Times & Mileage/Job Estimates vs. Actuals Summary

a. Enter the END date 12/31/15 in the “TO” date cell

Step 1

b. Customize and remove the “$Diff” columns in both Act. Cost and Act. Revenue

c. Customize and from the Header/Footer tab change the “Title” to read “WIP Dec 2015”

Step 2

d. Customer and Filter for ONLY WIP jobs – if correct Job Status has been applied to your jobs and updated as the jobs flow through the system then choose “In Progress”

Step 3

e. IMMEDIATELY you will see 2 very important things:

i. Are the Job Status markers correct for the jobs you expected to see?
ii. Is the QB information correct – in this example Bilbo Baggins’ job needs some clarification – in a BIG way.

Step 4

3. Now – correct in QB and then translate the information to the RA Excel WIP Workbook on the December 15 tab

Step 5

4. Proof the information between the two:

a. Est. Cost (in QB) = Current Job Cost Budget (column G)
b. Act. Cost (in QB) = Actual Cost to Date (Column H)
c. Est. Revenue (in QB) = Current Contract Price (column D)
d. Act. Revenue (in QB) = Total Invoiced to Date (column V)

5. When they match – column by column – you’ve finished the easy part of calculating your year end WIP (over/under billings)

6. Now you can begin the difficult part of the WIP calculation – the Estimated Cost to Complete

a. From Reports/Jobs-time & Mileage/Job Estimates vs Actuals DETAIL pull a report for each job where the Actual Costs to Date are significant – in this example you don’t need a Cost to Complete analysis on Bilbo Baggins’ house as there are so few costs.
b. Drop this report into Excel and makes notes on EVERY LINE ITEM – will you spend more to finish the job or have you saved this amount. From this report you can determine a BEST GUESS of how much the final project will cost.

Step 6

Don’t just assume the numbers are right – this is so important at year end that it’s worth the time to analyze each job which has significant costs to date in detail. You’ll get better at this over time.

c. THEN make the journal entry in QB shown at the bottom of the Excel spreadsheet

Step 7

BUT you’re NOT DONE YET – remember to REVERSE every WIP journal entry (click the “reverse” button and QB will do it automatically.

NOW you’re done with WIP for year end and set up for a more accurate gross profit calculation in 2016. Good work! Keep it up ….

Members, DOWNLOAD the new R.A. WIP Workbook for 2016 from the University website – this allows you to keep all monthly WIP in one workbook for the entire year AND see the all-important December year end 2015 WIP in the same place.

What Are Indirect Expenses and Why Should I Care?

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Understanding indirect expenses will greatly benefit your remodeling business. By pretending they don’t matter, you’re jeopardizing your remodeling company’s fiscal health.

Last week one of my very favorite people (yes you, that’s right YOU!) and I agreed to ‘argue’ about Indirect Expenses.  This is so important to me (and to you!) that I dropped everything including decorating my tiny Christmas tree to write this very important PowerTips Article.

First things first – some definitions:

FIELD LABOR BURDEN: all costs related to employees who work on jobs, including

  • Field employer paid payroll taxes – FICA/Medicare/FUTA/SUTA
  • Field insurances – workers comp and general liability
  • Field benefits – medical/dental/life insurances, paid time off, retirement contributions, among others
  • Field indirect expense allocation – an allocation intended to move indirect expense from overhead to COGS and therefore to the jobs

INDIRECT EXPENSES: all expenses related to keeping a field employee productive on the job but that can’t be easily tied to a specific job.  Field cell phones are a perfect example – if you provide cell phones to your field employees, it makes them more efficient.  However you can’t easily tie that cell phone bill to the jobs he/she worked on.

So we ‘bundle’ all these indirect costs into an expense range – called INDIRECT EXPENSES.  Here’s a good list from my QuickBooks Manual showing all the costs I think should be included. Comment below if you’d like the chart of accounts and I’ll send it to you.

Judith1

Now you know all the costs that should be included in Indirect Expenses – next we need to get these expenses into COGS AND equally important ONTO THE JOBS.

The BEST way to do this is through payroll – this makes the process automatic!  And it makes your average hourly field labor cost complete.

This is the payroll setup in QuickBooks:

  • Company contribution
  • Name – Field indirect allocation
  • Track expense by job
  • Liability Account: overhead expense account Indirect Allocation
  • Expense Account: COGS/Field Labor Burden/Indirect Allocation
  • Skip through the remaining data entry screens to Default Rate & Limit

Judith 2

The % rate to be allocated is the TOTAL of the Indirect Expense range (from your 2016 budget, you have completed your budget haven’t you?) DIVIDED by the TOTAL of the Field Gross Wages (from your 2016 budget).

SO – here’s the test: what would the Default Rate be if

The TOTAL budget for INDIRECT EXPENSES for 2016= $150,000 and

The TOTAL budget for COGS/FIELD LABOR/GROSS WAGES for 2016 =$450,000

If you said 33% – PAT YOURSELF ON THE BACK.  You get an A+ – $150,000 (the Indirect Expense total) is 33% of $450,000 (Gross Field Wages).

Judith3

The PROOF of the accuracy of this rate shows in the Actual vs. Budget for the INDIRECT EXPENSE range over the year ….  If you actually spend $150,000 in Indirect Expenses AND your field gross wages are $450,000 then the balance in the Indirect Expense range at year end will be ZERO.  And you’ll earn another A++.

 EXAMPLE of ZERO BALANCE BELOW

Table
And NOW you’ll have all indirect costs applied to COGS AND to the JOBS – you can now calculate your estimated labor costs so your estimates will capture all labor for the New Year! 

Think this was good? Well it’s just the beginning!

I do a session titled “Measure What Matters” at the Mastering Your Remodeling Business Workshop next month! (Yes, January 2016). Register right now so we can meet and discuss your financials! And there will be some other experts there, too. 🙂

GO FORTH AND PROSPER and HAPPY NEW YEAR!

Don’t Be A Hater: Accounting is Good for You!

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

Overhead:

  • 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

Other income/expense

  • 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!

How Remodelers can turn $50k into $2,505,000

Building your savingsDo you find yourself constantly aggravated about never having the cash on hand to accomplish all you desire or the capacity to jump at opportunities as they arise?

As small amounts of reserve capital begin to accumulate, it’s incredible how many demands surface to deplete us of that money: quarterly tax deposits, a job gone bad, a late subcontractor invoice that floated in from a job completed 90 days ago; and so on and so on.

Smart owners feverishly squirrel away any extra money not needed to pay this month’s bills and hope they won’t need it next month and maybe even will have a bit more to add to it if they’re lucky. This is building a savings account by the wish-and-hope method.

Really smart owners use a planned method that builds cash reserves. Here’s one I’ve recommended for years and used myself quite successfully.

Go to your bank and open a corporate savings account. The next check that you receive, have the bank show you how to make a split deposit between the operating account and your new corporate savings account.

Do not deposit the entire check into your operating account.

Take five percent of the total check and put it into that corporate savings account. Ninety-five percent lands in your operating account.

After that comes the hard part: You have to forget about that five percent split. Pay all obligations out of the operating account.

Put this money away mentally under a lock and key.

Do not touch it!

I have found that accumulating cash reserves in this way is addicting, and once entrepreneurs begin to taste it, it becomes an unquenchable thirst.

A $1 million company, at the end of one year, should have an unencumbered savings account of $50,000. At the end of five years, this will grow to $250,000 in cash sitting in a standalone account.

If this is accomplished by the time you are 40, and you never add another dime to it after that, you can simply let it grow at a 2.5 percent compounded interest rate until you’re 65 and you’ll have a $440,000 nest egg waiting for you at retirement. At five percent interest, it would be $770,000.

Now that’s really smart.

In that same 25 years, if you do add $50,000 every year, and it keeps growing at a compounded 2.5 percent interest rate, you’ll have $1.75 million. At 5 percent interest, it would be $2,505,000.

Now that’s really, really smart . . . and yeah, it is addictive!

You like playing with numbers? Check out the Growth Stability Calculator over at Remodelers University!

The 3 Top Accounting Methods and the Lies they Tell

Accounting Lies and how they misrepresentKeeping track of your revenue and expenses can be very time-consuming and even confusing. How can you accurately determine what your budget is, how much your expenses are eating into your profit and how to budget for a future project?

At its core, the biggest problem remodelers face when it comes to understanding how to best manage their money is the answer to one simple question:

When is a sale a sale?

Following are the three most common accounting methods we see remodelers using when they first come to us. They all answer this fundamental question in entirely different ways.

1. THE CASH METHOD

Question: “When is a sale a sale?”

Answer: “When we actually get the money!”

In the cash method, income includes all revenues received, and expense includes all bills paid. So we must have actually collected the money for it to be income, and we must have actually paid the bill for it to be an expense.

This method gives you a good idea of cash flow for the time period. However, this report potentially can be very misleading. Collect a first draw, and it goes to income. But you haven’t earned that money. You haven’t done the work it pays for. You’ve just gotten an advance.

Most entrepreneurs (not just remodelers) use the cash method when they first go into business.  It’s common but it does not give the most accurate picture of the company’s health. If you really want to manage your business effectively, stop using the cash method as fast as you can!

2. THE BILLINGS ACCRUAL METHOD:

Question: “When is a sale a sale?”

Answer: “As soon as we send an invoice!”

In the Billings method, Income includes all billed receivables (money people owe you) and Cost of Goods includes all expenses for which you have been billed. (money you owe someone else).

This method, too, can be a very misleading way to present company operations. One of our business management rules for remodelers is to stay ahead of your client in your billings and collections. This means that you are not acting as the bank for project expenses  … that you have collected money from your client in advance of purchasing for the project.  However, this “staying ahead” means many of your reports would look too rosy while others might look too dire.

For instance, you may have actually completed 30% of a job, yet billed the owner 45%. Because this method recognizes all billed amounts as income, your P & L report will show that 45% as income against only 30% of the job costs. Your next reports, however, will show 55% of the billings against 70% of the job costs. In this circumstance, your P & L’s would at first show your financial position as much rosier than reality. Then later P & L’s would show a poor picture as though your job costs were running very high in comparison to your income. This wild swing in your finanical reports makes it difficult to use them as management tools.  You want to manage with realistic figures.

3. THE COMPLETED JOBS ACCRUAL METHOD:

Question: “When is a sale a sale?”

Answer “Why, it’s not a sale until the job is finished (or substantially finished).”

This method tallies all money coming in for a job and all money paid and billed for the costs on the job but does not show these as income and expense on the P & L until the job is completed. Meanwhile overhead expenses are usually shown as they are expended each month. This is commonly used by new home builders.

Because this method is the slowest to show new dollars in income, it may well be chosen by your accountant to present information for tax purposes since it may defer your income to the next year for tax purposes. Of course, ultimately that income catches up with you in the next year.

If you use this method for your management reports, your profit and loss statement may look too negative. If you are a specialty contractor and your jobs are very short in duration (under a week), you can use this method effectively.

However for full line remodelers, this method is the most misleading.

Do not use the completed jobs method of accounting for your management reports if your jobs are under construction for more than a week or two.

So what is the best accounting method?

As you can see, these three “common” methods all have very misleading characteristics. Because of this, Remodelers Advantage requires our Roundtables™ members to run their day-to-day financials with the Percentage of Completion Method.  This method will give you the most honest and clear picture of where your company stands financially at any point in time.