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.

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

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.


The Remodeler’s Year End Checklist

End of Year Checklist for RemodelersIt’s that time of year again! Pulling together everything and anything, and getting ready for End of Year!

W2’s; Material Invoices; Payroll Liabilities; Vendor Statements; Reports, reports, reports – Where does it all end?

When I was doing the bookkeeping, I found it very helpful to have checklists to follow, to make sure I wasn’t missing anything important. And End of Year is the most detailed, most important of all!

Thanks to Judith Miller (and QuickBooks Year-End Guide), we’ve put together this End of Year Checklist for your bookkeeper to use. Following this list will make their jobs much easier and more streamlined.

If you have any checklists that you find particularly helpful, please share them in the comments below.

*Members, you can find this checklist and many more in our Resource Library


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