Contractors, even if they know their numbers, do a bad or non-existent job with budgets and cash flow projections. The vast majority of them make a profit of 1% or less a year. That was the message that the Quality Service Contractors heard from consultant Gary Elekes, a former contractor himself with a business degree from Ohio State and an accounting degree from Roosevelt University.
Elekes spoke at the QSC meeting in Minneapolis that was part of the Plumbing-Heating-Cooling Contractors – National Association's Connect 2011 convention and show. His talk was about accounting for non-financial managers, which describes most contractors — great mechanics who may be a bit uncertain on the management details.
Top tier contractors can make a 20% net profit, he told them. The best he's ever seen is 32% net from a Las Vegas residential HVAC contractor. But Elekes message was for the 80% of contracting firms making 1%.
"What are you prepared to do differently to improve your profit and loss statement," Elekes queried. "You can't expect to do any better without making changes."
Even if contractors know their numbers and charge enough to make a profit, too few of them put together an annual budget and they don't do cash flow projections. That's a problem if you get paid for future work, like warranty reserves or service contracts. You've committed to future labor costs, so you better not spend the money now.
It doesn't have to be complicated or expensive — Elekes said QuickBooks will handle most contractors. QuickBooks also makes it easy to divide up your accounts by department, something Elekes feels should be mandatory. For example, service work and installation work should be tracked separately.
Details, details, details. Assets should be self-explanatory — the building, trucks, furniture — but all those assets depreciate and depreciation should be its own line item. It's a true cost of doing business. Those trucks and computers have to be replaced.
Liabilities are what you owe now and what you’ll owe later, thus the need for a cash flow projection. Your net worth is sales and revenues minus your expenses. Cost of goods sold include equipment and labor, but what about benefits? The benefits for the field guys should be in cost of goods sold, but counted as overhead for the office staff.
The process starts in the field where all the information from sales and revenues is reported in. That's where the problems start too. You have to get your field people to turn in their paperwork and it has to be legible. It starts with you because if the boss doesn’t respect the process, neither will the employees.
The sales data flows from the field to the various journals to the ledgers, which are summaries of the journals, to the summary ledger and finally to the financial statement. The problem is that it is ancient history. By the time you see your financial statement, the information is 45 days old. If somebody or something screwed up, it's way too late to fix it.
Elekes is an advocate of daily reporting. Too much work, you say? Elekes' answer to that is all the data stays the same, which is the same answer he gives to objections that splitting your books up among service, replacement or new construction is too much work. You have to write it down somewhere. You might as well enter it in the right places.
Service techs are going to call in their invoices, credit card info and the like from the field anyway. Accounting is going to write it down. It's going to happen. And there are ways to do it electronically these days, wireless reporting from the field to the office that feeds right into your accounting system. Software companies have probably solicited many of you already for one of these systems.
Elekes suggests getting your systems for field reporting and accounting absolutely accurate and timely for monthly reporting first. Once that system is working, switch to weekly financials. Then daily.
This is a behavioral change. Software can do all of this. This is a test of your leadership more than anything else. Contractors with better information make better decisions and they can make adjustments faster. That can separate you from the one percenters.