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

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.

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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

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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).

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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

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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!