Your Mid-Year Financial Checklist

[Editor’s Note: As we near the end of the first half of the year, you should take stock of your business’s financial health. It’s a perfect time to revisit Judith Miller’s checklist for getting your numbers right — and set yourself up for success in the rest of the year.]

If you’re a baseball fan then you know that the all-star break is right around the corner. You also know that this game serves as a performance milestone, with most looking at a team’s season in terms of “before the break” and “after the break.”

Well, it’s your all-star break, too. How are you performing at the midway point of 2019?

For many remodelers, 2019 follows the trends we’ve seen over the past few years, filled with leads, jobs, and growth.

The two big questions to ask yourself now are “how happy are our clients?” followed by “are we making money?”

Now is the perfect time to take a step back, analyze your results from the first half of the year, and plan for better performance in the second half.

Your Financial Checklist

  1. First, make sure your balance sheet is right on June 30 – when the balance sheet numbers are correct, the profit/loss bottom line is correct to the penny, even if some income/expense has been mis-coded.
  2. Make your WIP (over/under billings) calculation correct for the end of June – if applicable.
  3. Review your profit/loss actual against your budget for the six months on a line item basis. Don’t only look at the bottom line, you have to know all the details.
  4. Recast your budget for the next six months, using what you’ve learned through the analysis in the second step. This is your opportunity to assure yourself of year-end profitability.
  5. Look at job costs reports — the estimate versus actuals detail — for a few standard, representational jobs you’ve completed during the first six months. Again, review line item details to make your estimating more accurate for the jobs in the bidding process now.
  6. Last, but certainly not least, measure customer satisfaction in detail to make sure that your rating is high and stable.

The mid-way point of the year is your opportunity to see where you stand; what is and isn’t working; and what changes need to be made to achieve the goals you set at the beginning of the year. This review is a key element to ensuring you have an all-star year.

Start 2019 by Closing Out Last Year’s Financials the Right Way

We’re in the first full week of the New Year — it’s time to buckle down and get back to work, putting all your plans for 2019 into action. But without some vital pieces of information, you won’t see a true picture of where you’ve been and how to get where you want to be.

You’re not done with 2018. January’s the time to take a deep dive back into 2018’s financials and close out the year the right way.

The Good Close

A good close is vital at year-end. It draws a line in the sand between one year and the next, and calculates an accurate equity number which allows you to accurately compare year-over-year results.

This kind of close also gives you insight into the effectiveness of your bookkeeping and accounting functions. It also enable you to tie your year-end financial statements to your tax return, and meets GAAP (generally accepted accounting requirements).

What You’ll Need

A good close includes a complete review of your Balance Sheet accounts, as well as reconciliation between Profit/Loss and Job Profitability Summary.  

Remember that all negative balances reflect an abnormal balance — research and figure out how that happened! Exceptions (above the Equity line) are Accumulated Depreciation, Indirect Expense Allocation (not the total) and Medical Insurance Payable.

Start by setting up a Memorized Report Group entitled “Year End 2018” to hold all the financial statements and related reports in one place.

  • Year-End WIP. The WIP affects both the Balance Sheet and the Profit/Loss. The year-end WIP is critical to the accuracy of assessing the gross profit, both for last year and current year.
  • The Balance Sheet. When the account balances are correct on the Balance Sheet, the Profit/Loss is correct to the penny!  
    • Liabilities:
    • Equity: depending on your company corporate structure the Equity accounts might be laid out differently.  
    • Owner/Shareholder Distributions for the current year should be posted to the Profit/Loss in the “Other Expense” section for development of the RA Focus Packet. Then journalized back to the Balance Sheet for tax prep.
  • Profit/Loss. Reconcile the Profit/Loss to the Job Profitability Summary (JPS) for the year to the Gross Profit Line.

Tying up your 2018 financial information is a crucial step to having a great, profitable year in 2019. Take some time to look back before plunging ahead!

Take a Deeper Dive with Judith

If you want to learn more about closing out 2018, Judith will be holding a one-time, 90-minute Strategic Action Group telecourse on how to properly conduct your year-end close. She’ll have a more detailed checklist and show you how to close right and bring your numbers in line.

This course will be held Thursday, Jan. 24, at 11 am ET. The cost is $325 and space is limited. For more information — and to register — e-mail Judith at jfmiller@remodelservices.com.

[Podcast] Episode 32: Industry Insights with Rick Strachan

If you’re curious as to where the remodeling  industry is going and the key opportunities for the future, Rick Strachan of Hanley Wood has your answers.

In this episode, Rick breaks it all down with Victoria and Mark, telling you what will drive growth, and how to face the coming challenges. You’ll get the big picture, detailed information to help you make strategic decisions for your future, and more numbers than you can shake a stick at.

Rick has worked in the media and information business serving the construction industry for 35 years, and for the last 26 years has been with Hanley Wood’s Remodeling Group. He is a founding member of the Harvard Joint Center Remodeling Futures Program, and is a past board member and former chairman of the Home Improvement Research Institutes Remodeling Professional Committee. He has also received NARI’s President’s Award for service to the industry.

The biggest drivers of remodeling, now and for the near term, are the Baby Boomers. Rick tells you what you need to know about this generation’s buying power and habits, as well as:

  • The predicted habits of Millennials in the remodeling space
  • The phenomenal growth in the industry and why the future looks bright
  • How to address your labor shortage
  • Why product and materials costs will escalate, and how to deal with it
  • Why HGTV isn’t all bad for business
  • What our aging housing stock means for you
  • And much more…

This episode is as close to fortune-telling as we can get. If you have any questions for Rick, you can email him at rstrachan@hanleywood.com. For more information about Hanley Wood and its news and information about the remodeling industry, go to their website.

Click Here to Listen to Episode 32 >>

QuickBooks ONLINE – Not Ready For Prime Time

In this week’s edition of PowerTips, our resident QuickBooks and job cost accounting experts, Judith Miller and Jackie Shaw, provide feedback and advice when considering QuickBooks Online (QBO) for your remodeling business.

Judith Miller’s perspective:

Over the past 18 months more and more Remodelers and R/A members have asked me about QBO; some already use it and hesitate to make the move to the QB Desktop version (QBD), which makes perfect sense. It’s in the cloud, people in different locations can access it without a dedicated server. It looks like it costs less (see Jackie’s analysis on QBO costs below). What’s NOT to like?

Others have recently been persuaded into moving from the Desktop version to QBO by QuickBooks support personnel who offer an update to QBO called “Projects” which promises “An Easy Way to Track Your Projects.” Unfortunately, even this new update doesn’t provide useful reporting.

Over the past six months I’ve worked with a handful of R/A members digging into QBO to test it for the most important functions of job costing. Note: click images below for a larger version.

Reports

The ability to get an estimated vs. actual job cost report showing BOTH anticipated hard costs AND marked up sales price: here’s what it looks like from my desktop version in collapsed version just showing estimated hard costs compared to actual. This is one of the two most useful reports for production management. When expanded you can drill down to the labor / material / trade contractor / other cost types to see the detail of both estimate and actual costs.

 

Some Options Not Available

In QBO the ability to add BOTH the estimated cost and the marked up sales price is NOT available according to the most recent update information. Here’s the print screen from the Projects section of the program:

 

Not able to apply Labor Burden

QuickBooks Online doesn’t apply labor burden to the jobs (this image from a March 2017 blog post)

Not on the horizon

Job Costing doesn’t appear to be high on the Intuit priority list (from their Support website)

With the above reasons in mind, I can not recommend the online version of QuickBooks (QBO) at the current time. Sorry, but the DESKTOP version does really good job costing and applies fully burdened labor to items/divisions of work by hours. In my opinion, choose the DESKTOP version and save yourself the pain of “work-arounds.”

 

Jackie Shaw’s Perspective:

Here are my top 5 reasons NOT to use QuickBooks Online (QBO) in order of importance:

1. Intuit does rolling updates without notice or explanation

Recently, the SOP that I created for a client to enter budgets, QBO’s way of tracking estimates, “broke” after an update. At first she thought it was a glitch because QBO has plenty of those.

When I talked to Pro Advisor support and found out it was an update change I told them they just made it even harder for our R/A Members to use QBO.

2. Did I mention QBO is glitchy?

Your bookkeeper may be entering updating on a form and it does not actually change after saving. Or it looks like the change was not made on the report until the user logs out and log back in. QBO will freeze and slow down to a crawl when your internet connection is fine.

This means less efficient bookkeeping and very frustrated bookkeepers.

3. The reporting capabilities are poor and you cannot create custom reports

Talk about a bummer! You get all your data organized in a database and then you can only create maybe 50% of the reports you can create in QuickBooks Desktop (QBD).

4. The payroll product for QBO should not be used.

QBO payroll add-on creates the expense and liability accounts the app will use. Users have NO ability to change the mapping. This means your bookkeeper has to recode payroll expenses to do job costing and divide wages by department.

I strongly suggest Remodelers and R/A members have payroll processed by a local bookkeeper so you can have easy face-to-face support as needed. Your bookkeeper will still need to enter all the payroll job costs in QBO. For example, I provide my clients with a tailored excel worksheet to make the process easier.

5. It is more expensive

Most Remodeling companies need the version that costs $600/year. QuickBooks Desktop Premier 2018 2-User is currently $550. You can use the QBD version for three years before you have to renew. You pay for QBO annually.

Result: QBD $550 for 3 years, QBO $1800 for three years. What could your business do with an extra $1,300?

Tip: If you are using QBO, you can have your subscription added to an accountants wholesale license. Jackie’s company offers wholesale pricing so her clients save 50%. Result is $550/3 years vs. $900/3 years; great savings but still more than QBD.

One final tip: Look into Right Networks for multi-user mode QBD hosting in the cloud if you want access from anywhere. If users only need to access QBD in single user mode look into QBox. This is a great product similar to Drop Box, created specifically for QBD, and a great set up for collaboration between remote users.

My Summary

I do not suggest QBO because users never know when their process documentation will become obsolete, users are crippled by the lack of reporting and working in the cloud can be a real pain.

QBO normally starts crashing and slows down to a crawl after I work for more than 1.5 hours. What does that mean to your office staff who are working full-time?

IF you insist on using QBO you should have no more than 3 employees in the field (third party payroll entries are a pain), do not plan on field staff growth and use an app that only interfaces with QBO.

 

What is your experience?

Anyone out there run into similar issues running QBO? Have you discovered work-arounds? Would love to hear some feeback on this.

Thank you to our Associates, and R/A Facilitators, Judith Miller and Jackie Shaw for their help with this important product review and update. Here are their e-mail addresses if you have questions or would like to work with either Judith (jfmiller@remodelservices.com) or Jackie (jackie@gojackieshaw.com).

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.

9 Rapid Response Steps to Handle Cash Flow Issues

Cash flow issues can be very challenging to manage. They can show up unexpectedly. They can come on very quickly. They can distract the business owner from the important work he or she should be doing.

They can disrupt the ability of the company to get a project done. And in their most severe form, they can cause a business to fail.

A cash flow issue is always a symptom of a bigger underlying problem. Often times, business owners will ignore the early indications of a cash flow issue. They might choose to ride it out the best they can. Or, they might borrow money to keep the business flowing.

They will likely reduce or eliminate their own compensation. They will deal with the symptoms of not having enough cash without actually figuring what is causing the issue.

There is another way, a better way. First, as soon as you start having cash flow concerns, you need to act, quickly and deliberately. If you find yourself in that situation, you should…

  1. Quickly assess the reality by capturing all expected cash deposits and all demands on cash for the next 90 days.
  2. Organize expected cash receipts and all projected cash expenditures into a cash flow worksheet that monitors weekly demand and ends on the day of the week that payroll must be covered.
  3. Develop a strategy to immediately lessen cash flow burdens and buy some time with short-term measures – ask what can you cut without impacting customer service?
  4. Dig in to find the root causes of the problem, why is cash flow tight.
    • Slow paying clients or poorly structured draw schedules.
    • Low profit margins.
    • Job delays in design, production or completion.
    • Unexpected overhead costs.
    • Any number of other potential causes.
  5. Develop appropriate countermeasures (strategies for attacking the root cause).
  6. Determine how much will be take in short term funding to weather the cash flow situation while you are fixing the core problem.
  7. Make arrangement for short-term cash “bridge” to keep things flowing during this critical time.
  8. Respond immediately to any delay of payments or differences in projected amounts that will adversely impact the cash flow situation.
  9. Continue to monitor cash flow 90-days out until you know the issue has been resolved

Moral of the story

Cash Flow Issues do not get better with age. The sooner you can identify the problem, identify countermeasures and take corrective action, the better chance you have to get cash flow restored and the business back on track.

[notification style=”success” font_size=”14px” closeable=”true”]Note: This is Part 2 of a 3 Part Series on Cash Flow, presented by our Director of Consulting, Doug Howard. Click here for part 1: “There is No Such Thing as a Cash Flow Problem”.[/notification]

Look for future PowerTips in this series on Cash Flow, “Improving Cash Flow by Improving Production”.

 

There is No Such Thing as a Cash Flow Problem

Well, how could that be? If you have more bills to pay than money to pay them, isn’t that a cash flow problem?

My guess is that if you are a business owner who has ever faced that situation at any point in your career, you would most definitely have considered it a problem. In fact, you might have considered it an emergency or maybe even a crisis.

So why would I say there’s no such thing as a cash flow problem?

The reason is that while cash flow can be an issue, it is really a symptom of a much bigger problem. So, we really need to dig in to find the “root cause” so we can make sure that whatever is causing the situation doesn’t keep creating cash flow issues, and more importantly that the situation doesn’t get worse.

Think of a cash flow issue like you would think of pain in your arm. If it happens only once you might disregard it as something that just happened. You might take aspirin, put some ice on it or just let it rest. And that would be that. However, if the pain returns, becomes more frequent and more severe, you begin to realize you need to get it checked, get an x-ray, or even see a specialist. You need to find out what’s causing the pain.

Sometimes in business, we deal with a cash flow issue like that pain. In lieu of aspirin, we might put money in the business, tap a credit line or start using funds that are really for the next job that just signed a contract. And like the pain, if the cash flow issue comes back it tends to be more serious and more frequent, all the while you are depleting resources.

Soon, you might find that the issue has gone on too long. Resources have been exhausted that now need to be repaid. And, you might not have the time or money to fix the problem. Now, we have a mess.

Moral of the story:

Cash flow issues need to be addressed quickly, monitored accurately and resolved at the root of the problem!

Cash Flow Series

Look for future PowerTips in this series on Cash Flow; “Rapid Response to Cash Flow Issues” and “Improving Cash Flow by Improving Production”… coming soon!

The Path to Higher Profit: Strong Leaders & Good Numbers

After more than 30 years of working with remodelers around the country, I have encountered nearly every problem to confront a remodeling company: the dissolution of long-term partnerships, ineffective marketing tactics, sales systems that don’t produce results, unmotivated production crews, theft from overhead coffers, bankruptcy and terrible accidents on the job.

On the other side, I’ve seen phenomenal successes: great customer satisfaction, happy employees who are ready, eager and capable of taking over the company from the owners upon retirement, and substantial consistent profits over time.

Strong Leadership

Each outcome, success or failure, is the direct result of one key component; Strong Leadership.

Good, sound leadership imparts vision & motivation to employees who then implement tactics appropriate to each of the main areas of the company: marketing, sales, estimating, production and finance/administration.

At almost every Remodelers Advantage Roundtables meeting, we clarify the tactics necessary to reach the next level of success for each unique company.

These tactics typically apply to one or two main areas: For example, one portion of the company is working well; let’s say sales in the current economy, while production slippage results in less gross margin than budgeted.

Good Numbers

November is the perfect time to be looking at your numbers for the past year, and then to be making appropriate plans to improve in the upcoming year. The numbers you are looking at provide “proof of concept.”

Want to know if your marketing is working, look at the number of qualified leads received every month. How about sales… look at sold volume compared to budgeted sales. Did you hit month-to-date and year-to-date numbers?

In every main area of your business, certain time-tested systems apply. Get these systems in place, establish goals for each and then test your assumptions AGAINST GOOD NUMBERS.

The Bottom Line

Talk all you want about volume, but until you meet the criteria for success in the other areas of your business, you’re not assured of increasing gross profit.

Strong leadership and a good team can build a growing company, however, as you grow, only effective systems implemented by good employees can produce consistent net profits. You will only know this if you have good numbers to analyze. Use them well and Good Luck!

PowerTips TV Throw-back Thursday: “How a Job Autopsy Can Save Future Profits”

In our last throw-back episode of the season, we take a closer look at Slippage and how it can destroy the profit margin your team works so hard to obtain.

In order to keep it from becoming a recurring problem, we cover how to perform a “Job Autopsy” or a break-down of where things went wrong… where costs started to invade your production plan.

[notification style=”success” font_size=”14px” closeable=”true”]We’re excited to launch our new season of PowerTips TV next Thursday with all new episodes! If you have ideas for topics you would like us to cover, please suggest in the comment box below… And if you haven’t subscribed to our YouTube Channel, Click Here.[/notification]


This week I’ll share some examples of how slippage can destroy your profits. More importantly, you’ll see how performing a thorough job autopsy can prevent future slippage.

So if you’re looking for ways to increase your profits, look no further than this week’s episode of PowerTips TV and learn one very effective technique for eliminating waste and ramping up profits.

Crack That WIP – 8 Dangerous Data Entry Errors That You May be Making

During the recent Remodelers Summit in Minneapolis I gave two presentations on the finer points of WIP – or more specifically what I’ve noticed over years of studying the nuances of this incredibly vital and complicated tool. The majority of the information is relatively straightforward – but a few problems recur in many RA Member’s WIP.

And most people don’t even know their WIP is wrong! IF the WIP is wrong the journal entry is wrong, the profit/loss and the balance sheet are wrong. WRONG WRONG WRONG!

Here’s the test: complete the Margin Variability Chart (Download Here if you don’t have it) which compares gross profit margin month to month over the space of the fiscal year. Below is what it should look like: gross margin month to month within 2% points, plus or minus, from the budgeted yellow line.

However below is what it often looks like – the technical term is “all OVER the place!”

Your question might well be: why does it matter if your gross margin varies month to month if the year to date is close to the annual budget? In the case in the image above, it is – 29% average over 8 months.

It matters for two important reasons: significant fluctuations indicate a ‘systemic’ problem with the WIP process AND it makes your monthly budget reporting useless. Have you ever looked at the budget to actual report for a given month, known something was really off and put it aside perhaps never to use this important tool again?

[notification style=”success” font_size=”14px” closeable=”true”] Do you want to learn more about this? Judith is one of our key speakers at the Master Your Remodeling Business Workshop coming up in January! CLICK HERE for more information. [/notification]

So, let’s figure out why the WIP might be incorrect: after more than 30 years of using the WIP calculation and really digging into it the last 15, here are 8 errors in data entry that occur over and over again.

In order of most dangerous:

  1. Inaccurate cost to complete – this calculation sets up the over/under billing journal entry which flows to the profit/loss and balance sheet. If this number is wrong the journal entry is wrong as well as the financial statements.
    • Do a detailed line by line review of all larger jobs at 40/60/80% complete;
      • Before 40% you probably don’t know how the job will turn out; after 80% there’s probably little you can do to change the outcome.
      • Bring the job lead together with the job cost accountant so both know the costs included to the end of the month compared to % complete by site visit.
      • Enter internal change orders when you know you’ll either save money or spend more money on a line item but can’t bill the client.
  2. Actual labor rate not used in estimate – if the labor rate includes ‘hidden gross margin’ making the estimated labor rate higher than actual the % complete calculation for the job is incorrect making the earned revenue incorrect.
    • Complete the labor burden calculator ((on the RA website) for each field employee and compare to actual costs for that employee.
    • Update payroll calculations to bring the costs close (again within 2% +/-) on the job.
    • Review estimated vs. actual labor HOURS as well as dollars.
  3. Not tying WIP spreadsheet into accounting data – because the WIP journal entry changes the accounting reports it is essential that the data used to produce the WIP spreadsheet has a one to one correlation.
    • Set up a Memorized Report in your accounting for the jobs on WIP and enter the Actual Costs and Invoiced to Date on the Spreadsheet in exactly the same amounts.
    • Proof the TOTALS from the report to the spreadsheet. They should be identical.
  4. Incorrect prior year end WIP – if WIP is wrong at the end of the prior year the reversal into the New Year produces an incorrect starting line against which to calculate on-going monthly revenue.
    • Make SURE your WIP for year end is correct – if it’s not the entire new year will be incorrect to the degree of the year end reversal.
  5. Jobs costs or client invoices entered AFTER WIP is complete (or in progress) – if you follow the rules in #3 above you can always go back to any month to be sure amounts continue to be identical from the accounting report to the WIP spreadsheet.
    • Don’t enter, or allow anyone else to enter, any job related costs or income BACKWARDS to the month for which WIP has been completed.
    • Set up a closing date password when developing the Memorized Report to be used for the WIP spreadsheet and don’t allow anyone else to enter backwards without your knowledge.
  6. Change orders not correct – the original contract and original budget amounts on the WIP spreadsheet are straightforward: both come from the signed contract and never change over the course of the job. However the final/revised contract and budget are changed by Change Orders.
    • Enter change orders with to both the contract price and the budget.
    • Proof the gross margin for change orders to be sure it makes sense.
  7. Changed formula cells – many people use the same WIP worksheet over and over and sometimes enter ‘zero’ in a formula field or over-write the formula …. Thereby potentially causing significant errors in calculations.
    • Begin each year with a new WIP workbook for the year – download it from the RA website.
    • Enter the December WIP information from the prior year, update each tab for current months in the New Year.
    • Review the totals formulas monthly to be sure the formulas are correct.
  8. Keeping 100% complete jobs on the WIP – many RA members keep their completed jobs on WIP: this skews the ability to see the FINAL gross profit on WIP separate from the FINAL gross profit on completed jobs.
    • When a job is 100% complete it has been:
      • Income billed to the client 100% – regardless of when paid.
      • Expenses entered to the job 100% – regardless of when paid.
      • There is no over/under billing.
    • Leave it on for one more month after the following conditions have been met to be sure you’ve captured all costs.
    • Then move the completed job off the WIP to the Completed Jobs tab on the spreadsheet and post any subsequent expenses to Warranty.

NOW, you should have NO trouble smoothing out the gross profit line, month to month, your budget vs. actual reports for the company will be truly useful and YOU’LL BE HAPPY! Right?