In the first two days of August I had on-line meetings with four clients all in a panic because gross profit margin for the first six months of the year varied widely – from -55% to +104%.
And they should be panicked – how can you trust your numbers with that kind of variance? You can’t – no way!
Because all four remodelers were following Remodelers Advantage best practice and calculating Over/Under Billings every month, their gross profit margin variances should be small – IF the O/U calculation was correct.
In each case there was a “NON best practice” in play which produced much of the wild swings:
- Posting backward after the O/U journal entry had been made;
- Estimated labor costs not equal or even close to actual labor costs;
- Incorrect WIP at the end of prior year;
- Numbers used on spreadsheet to calculate O/U not tied to accounting data;
- Incorrect calculation of estimated cost to complete;
- Posting of job costs not in the month in which the work was done.
So, how can you determine if you’re doing everything right?
Here’s the test
In the Margin Variability Chart (above) enter the gross profit margin from the profit/loss from your accounting system January to June. There should be no more than 2% plus or minus variance month to month.
Here’s another test
In the Golden Triangle Chart (above) enter the gross profit margin from three different places. Again there should be no more than 2% plus or minus variance month to month.
Both tests prove the accuracy of your job cost postings AND over/under calculation.
What should you do if you fail the tests?
The first thing would be to make sure you’re not doing one or more of the “NON best practices” listed above. If you are, fix it. If you’re not, (or you don’t know how to fix it on your own) then you should set up a call with us – right this minute!