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How do small contractors know if they made any money today?

Dec. 3, 2013
I'd like to know if there's a simple answer to the question, "Did we make any money today?" It seems simple: We earn a bunch of money. Yay! But then we spend a lot to stay in biz. Boo! It seems to me there should be something left for us to spend on such frivolities as … well, say, food.  

I said last time I'd write regarding a decision about Flat Rate and going into business, but a topic came up on the Service Round Table forum that intrigued me so much that I couldn't help responding. (And I hope you smart owners have leveraged your bucks by spending that $50 to join the Service Round Table by now!) The topic had to do with — may the heavens help us here! — understanding the basics of accounting!

Anyways, I figured us smaller tech-savvy but numbers-challenged types might be interested in reading what my drift was, so here goes. I know this may sound naive, but like many tech pros I'm accounting-challenged, so I'd like to know if there's a simple answer to the question, "Did we make any money today?"

Yeah, this question may seem a little on the dense side, but that's me, but I am writing a series of articles for the on-line edition of CONTRACTOR Magazine directed at us smaller contractors to help get us into Flat Rate without spendin' our average life savings of roughly $12.53 or going bonkers attempting to be business people.

Personally, I realize I was successful because — maybe only because — my wife, Rebecca, understood accounting, but others can't all be married to a Rebecca. Still-'n-all, when I asked the question, “Did we make any money yesterday?” she'd launch into what I can only call “Enron accounting” and leave nuthin' but dust in me ol’ Irish brain.

It seems simple: We earn a bunch of money. Yay! But then we spend a lot to stay in biz. Boo!

Be that as it may, after all them yays and boos, we should have some coin left to repair our Harleys (or Vespas … whatever).

So as not to appear totally ignorant, here are three things that I do know:

1) Some small portion of earnings goes to simply stayin' in business: salaries, vehicles, stock, phones, advertising, etc.; 2) We “joyfully” donate another portion to our insurance companies so we can sleep at night; and — prolly the most “pleasurable” of all — 3) We “gratefully” pledge ever-and-ever larger portions to our friends in the federal government who have only our best interests at heart so they can protect us from such horrible social atrocities as inter-species marriage, wars on an herb that grows accidentally in our neighbor's backyard, and illegal aliens entering our planetary system.

Anyway, after all the above, it seems to me there should be something left for us to spend on such frivolities as … well, say, food.

And there should be a simple financial statement that we can understand, like: 1) We earned X; 2) We spent X; and 3) We now have X left for our companies and ourselves.

Instead, this is what we get:

“The Statement of Cash Flow starts with your beginning cash balance and accounts for inflows and outflows of cash as well as adjustments to the net income for the period in question (items like depreciation which is a non-cash expense) which leads you to your ending cash balance for the period.”

Or here's another one:

“Operating Activities start with Net Income (Loss), add back depreciation expense, adjust for changes in current assets and liabilities and total it up which give you your Cash Flows from Operations. Examples of adjustments: Accounts Receivable going up during the period means that you have less cash and vice versa. Accounts Payable going up during the period means that you have more cash and vice versa.”

Uh, huh. Got it. Not!

My deepest apologies to Michael Bohinc for quoting the above because it was something he posted in a hurry to a question on the Service Round Table. He has promised to write articles to make accounting something we can all understand, and I know and trust him. We'll all benefit from his upcoming articles on contractormag.com and, if accounting can be made understandable to laymen, he can do it. After all, he's one of us — his family operates a contracting business just like ours.

P.S.: I do understand the difference between cash and accrual accounting, which is why I love, adore, respect, worship, and adhere to Flat Rate; and, if you have questions, or would like some very inexpensive coaching to get you started with your biz, contact me @: [email protected] or 415/453-2291.

Retired Master Plumber Ed O’Connell is a pro-active consultant to the subcontracting industry in Fairfax, Calif. he can be reached at 415/453-2291 or at [email protected].

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