How well do you know your business’ numbers?

This entry is part of 5 in the series Business Coaching

There are two books that can change your relationship with finance (I’ve used them over the past 10 years): 

 

      1. Financial Intelligence by Karen Berman & Joe Knight with John Case 
      2. Simple Numbers, Straight Talk, Big Profits! By Greg Crabtree

 

Both of these books break down financial concepts into simple and digestible blocks.

 

Karen and Joe focus on explaining standard financial terms that most of us pretend to understand, and don’t. I’ve read this book multiple times. They do an excellent job of showing the wiggle room that exists in finance. When people say, “The numbers don’t lie.” I always respond, “Yes they do”. What the numbers are saying is often predicated on who’s entering the information and what they know (or don’t). 

 

On page 4 of Financial Intelligence, “Accounting and Finance are not reality, they are a reflection of reality, and the accuracy of that reflection depends on the ability of accountants and finance professionals to make reasonable assumptions and to calculate reasonable estimates.” 

 

The result? Numbers end up being skewed often to make the company look better or they are a mess because the person inputting doesn’t understand the ramifications missteps can make. 

 

On the next page, they use the example of Revenue or Sales. You’d think that would be an easy matter to determine. But the question is “when should revenue be recorded?”

 

      • When a contract is signed
      • When the product or service is delivered (or performed in our case)
      • When the invoice (Req) is sent out
      • When the invoice (Req) is paid

 

They suggest booking the revenue when the product or service is delivered, but that depends on Labor Production and is highly dependent on your crew and your PM. 

 

41% of fraud cases are pursued by the Securities and Exchange Commission (SEC) involved when sales are recognized, so this isn’t a small issue.  

 

I tend to recognize the entire contract upfront and change orders are booked at the time of signing. This keeps the P&L clean against the project finances. I, also, book any loss at the close of the project. 

 

My sister, who works in Finance for a very large solar company, always tells me that it doesn’t matter how you decide to book your revenue (or expenses), but you have to make sure you do it the same all the time. Consistency is the key. Set up your rules and then follow them. 

 

This steady reporting enables you (or your financial team) to pull a great deal from the past into the future. This means your Forecasts will be more accurate than your guesses and wishes for the future. If you have historical data that states your growth rate is 20% annually, guess what your projections for next year should show? 

 

That’s right, a growth rate of 20%. 

 

This is also why the Office Manager should NOT be doing your books. Garbage in, garbage out. Most often an Office Manager is a luxury small Contractors can’t afford. 

 

From my perspective, the two most important “office” roles for any smaller Contractor are a bookkeeper (whose business is to do bookkeeping for many Contractors) and a Project Manager. This is aside from the basic step of having an Attorney and an Accountant you trust, which should happen within the first month of business. 

 

If you have crews in the field and you don’t have a Lawyer or Accountant, we will make some connections for you. 

 

Contact us immediately!

 

 

There are infrequent things that you’ll have to take care of, like your General Liability or Workers Comp audit, or renewing Certification/Licensing, but they are essential and can be managed with minimal effort if you don’t avoid them

 

Our members and my coaching clients get a financial education when working with us. We build, over time, financial systems that are grounded on one thing: your labor number. 

 

If you think that’s the amount you pay your crews, you are way off the mark. Before you even bring your crews into the equation or your payroll burden, you need to know your Operating Expenses. 

 

Operating Expenses are the cost required to keep your day-to-day business going, regardless of whether you have a team in the field or not. This included your GL, salary, office rent, storage space, trucks/their insurance, any loan or line of credit payments, etc. 

 

Globally, Operating Expenses are listed on your Income Statement and subtracted from your revenue, along with Project Costs, to determine profit. 

 

This is why bookkeeping is so important. If you don’t know what you spend regularly, how do you know what your Operating Expenses are? You won’t. Period. 

 

Without a knowledgeable bookkeeper, how can you differentiate an operating expense versus a project expense? Do you book expenses against projects? Or do you lump them together? If you lump them all together, how do you know if a project is profitable? 

 

Aside from not being able to break out your Operating Expense from Project Expense, when something basic isn’t organized and clear, you can’t see where you are going. 

 

The first thing I do with every single Contractor I work with is to uncover their Operating Expense and fold it into their Labor rate. This ensures you recover those costs when your team is in the field. 

 

One of our Contractors tripled his labor rate after working with me for two months. He didn’t lose one service client, he didn’t lose any of his contract work. 

 

That brings us to the second of the two most important office roles, a Project Manager. You may be your team’s office manager. If that’s the case, you need to know what you are doing. If you don’t and you don’t want to learn, hire someone. 

 

In “Simple Numbers” Greg focuses two complete chapters on what most Contractors ignore: Labor Productivity. 

 

Along with failing to capture Operating Expenses, Labor Productivity is one of the reasons Contractors go out of business. But just like capturing your expenses with a good bookkeeper, a good PM will make sure you’re hitting the right rhythm in the field. 

 

Generally, a Project Manager is either driving a project or reporting on a project. What’s the difference you ask? 

 

      • When a PM is reporting on a project, they are in a passive state. Most often they are relegated to documenting what’s happening on-site and are supporting the work of the Super and/or Foreman.

      • When a PM is driving a project, they are in an active state. Specifically, driving the Super/Foreman towards pre-determined benchmarks that align with the project schedule. 

 

What does this have to do with your numbers? Everything. 

 

When your crews are driving towards goals and the teams are aligned, meaning material is showing up and tasks are being completed per the schedule (this also assumes the work passes QA/QC inspections). The PM is able to set up Req payments that will keep cash flowing through the business and they align with the Schedule of Values that were submitted at the beginning of the project. 

 

When you bid on a job, you’re taking the hourly Labor rate x number of hours to complete the task/project = bid (leaving out materials, which I will touch on separately at a later date). 

 

Often smaller Contractors stop there. And this is where they go horribly wrong. 

 

      • Who’s communicating to the field that they only have a specific number of hours to complete the project? 
      • Who’s deciding what should be done and by when to meet your substantial deadlines?
      • Who’s driving your team towards that goal?
      • Who’s pulling your team off the project if floors/areas aren’t ready for them?
      • Who’s tracking what each of your crew is completing each day to ensure you’ll hit your benchmarks?

 

The dynamic synergy between the office and the field is not a luxury, it’s imperative to create a stable company that can grow. This synergy comes from your Super/Foreman AND your PM. These two act as a team to execute the project as close to the bid as possible. If this doesn’t happen, you won’t be able to grow sustainably and predictably. 

 

My goal with this article isn’t to frighten you, but to ground “knowing your numbers” into two actionable steps that you can begin to implement this week: 

 

      1. Get a bookkeeper that works with other Contractors.
      2. Get a PM or learn to do it yourself.

 

I hope you can see that getting a handle on your business finances is not something only big companies have time for, nor is it totally complex. Make a commitment to put solid systems in place 

 

These are two steps anyone can take towards a more transparent, stable future. 

 

If you need structure and want help to build your business, reach out to me. We’re here to help. Schedule a meeting and let’s talk about how we can support you to achieve your goals. 

Want to know more about our members’ experience at CMC Network? Listen to our podcast, Constructing a Business! Available on Spotify and/or Anchor.

 

Don’t forget to check out more of our blog posts about Business Coaching!

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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