How to avoid cracks on financial foundations?

This entry is part 4 of 5 in the series Business Coaching

What exactly does record keeping mean? It means different things to different people.

 

If you ask a safety manager on a job site, he’ll probably pull out a big 3-inch binder full of sign-offs, toolbox talks, safety plans and JHAs.

 

Ask a project manager and they’ll probably give you a series of spreadsheets with Gantt charts on the project schedule, budget, labor used and remaining, and materials loaded onto the site and scheduled for delivery in the next few weeks. If they are really well organized, the permit, contract, and estimate will be part of their records.

 

Ask a licensed electrician or plumber in NYC, and you’ll get side-eyed, because their records are often stored on the DoB portal. They tend to protect this information tightly because it is associated with their license.

 

Ask a contractor and you may get a panicked look, because records at this level are often financial in nature. Few contractors have their “back end” in order.

 

Clearly, record keeping means something different to everyone, even in the same industry. Today, we are looking at contractor financial record keeping.

 

Specifically, bookkeeping.

 

In the coming weeks we’ll be discussing a few things:

      • Chart of Accounts
      • Labor Rates
      • Purchase Orders
      • Estimates

 

As an entrepreneur, it is imperative that you “know your numbers”, i.e. you need to delve into the dark depths of your finances to know beyond doubt how much it costs you to send your crews out.

 

You may be the most skilled tradesperson in the field, but if your business is not on solid financial footing, your time will be limited and likely filled with a lot of stress and anxiety.

 

There’s no reason for that.

 

If you can answer the following questions, you are on the right track. If not, you should either do some research or get some help to make sure you are headed in the right direction.

      1. Do you know if you are digging a bigger hole or building yourself a solid foundation, each time you send your team into the field? 
      2. Do you know if you have the right crew size to justify the number of people you have in the office? 
      3. Do you know your labor rate? (this is the price you charge to send men into the field)
      4. Do you know what your labor burden is? (this is how much it costs you to send men into the field)
      5. Do you know what your Operating expenses are? 
      6. Do you know your profit margin?
      7. If you do, how often do you hit it?

 

Reading the following articles will help bring clarity to these issues, or at least a closer understanding of what needs to be done to make your business financially sound.

 

Often, business owners who have been in the industry for many years believe that this kind of clarity is not necessary. They are very skilled (often through trial and error) at creating estimates by eye, often on challenging residential projects. A senior handyman is very good at estimating how much residents want to spend on the work that needs to be done.

 

Unfortunately, they have developed a system that does not translate to the highly profitable areas of construction where their skills are desperately needed.

 

Learn how to use records instead of your memory to identify the frequency of financially dangerous misjudgments that can cause cracks in your financial foundation.

 

Bookkeeping is an indispensable tool as you begin to unpack and restructure your business to become truly profitable.

 

Bookkeeping is NOT, reconciling your business bank account at the end of the month. Do you make purchases on your personal credit card? Do you have a line of credit? Loans? Multiple business accounts? A good bookkeeper will track how much money you plan to spend, how much you actually spent and catalog it accurately.

 

When I first start working with a contractor, our first project is to unpack the labor rate, which I break down into three parts:

    1. Labor Burden: this includes the rate of pay, benefits, payroll tax and workers compensation. 
    2. Operating Expense: this includes all of the costs associated with running the business regardless of whether there are projects running or not. For smaller contractors this includes GL, Umbrella and Auto insurance. 
    3. Profit: this is often a percentage. 

 

The part that often causes contractors to stumble is operating expenses. Many start by making a list of the expenses they think they have. That’s fine for theoretical purposes, but if you have an operational business that has been running for years, it’s best to be able to draw from your books.

 

You need to capture all the costs that go into running your business when your team goes out into the field. The only way to do this accurately is to make sure you know your actual operating costs with all the errors and deficiencies.

 

It’s pretty easy to justify a $50 dinner if you are used to $50,000 checks coming into your bank account, but if projects are actually costing you $48,000, you probably can not afford that $50 dinner.

 

Next week we will look at the Chart of Accounts, which is a fancy way to catalog your business and project expenses. Only you can decide how to record your expenses, but there are a few things to keep in mind if you go this route.

 

In the meantime, you should contact a qualified bookkeeper, ideally someone who has experience in the construction industry. He or she can help you break down project costs and operating expenses. Once you have cataloged at least six months of expenses, you can begin to set your labor price.

 

If you’d like to have a conversation about how we can help you build a contracting business that’s ready to scale, schedule a meeting with us!

Author

  • Vivian Mandala is the founder of CMC Network and has worked in NY Construction for over 20 years, most of which was as a Contractor. She is now a Construction Business Coach. In 2017 Vivian, along with a group of dedicated Contractors, CM’s, GCs and Developers, started CMC Workforce, a long term in depth construction training program. Vivian enjoys the personal connections she makes through her coaching and seeing the lasting changes that she sees her clients benefit from year after year.

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