|
Page 2 of 2
The Benefits of Regular Reporting
Our firm instituted a weekly job review and estimated cost to complete process for one of our remodeling company clients. Job margins for the client increased by twenty points as a result of immediately identifying problems and making corrections in preconstruction in the future. Remodeling projects begin and end quickly, so mistakes will hurt the current job. Those mistakes do not have to be repeated if you institute weekly reviews and estimates.
It can be difficult and time-consuming to correctly prepare an estimated "cost to complete schedule" for larger jobs in their early stages, yet it is worthwhile. You may continue to assume your estimate is correct. However, the estimator, project manager, job superintendent and controller must review a job early on to determine what is needed to complete and uncover looming problems. That step will create better value engineering, change orders will be billed in a timely manner and job profit will increase.
Schedule of Cash Flow and Working Capital
The schedule of "cash flow and working capital" provides a map of where your cash resources covering the period of the income statement originated. It consists of profit, new loans or repayment (principle due more than twelve months in the future), purchases or sales of capital assets and depreciation. All of these have the effect of increasing or decreasing cash. An accurate reading of the schedule allows for better billing practices, better collection practices and prevents slower paying of vendors and subs. It shows where and how money was used to absorb losses, the debt principle repayments and may contribute to faster paying of bills. It prevents poor billing practices, slow receivables and reflects retainage receivables, purchase of equipment or other assets. If the opening and closing period balance sheets are correct, then this schedule will be correct. Remember, though, if the balance sheets are not correct, do not waste your time looking at this schedule or any other financial statement because they will be wrong!
Working capital is defined as the total of "current assets" comprised of your cash, receivables, retainages, costs in excess of billings, work-in-progress, inventories and prepaid expenses minus your current liabilities. Your current liabilities are comprised of your lines of credit, principle payments of debt due within twelve months, accounts payable, accrued expenses, payroll, taxes, billings in excess of costs, customer deposits and deferred income. A greater than 1:1 ratio is important.
Your bank may require a defined working capital ratio, so check your loan documents. If the ratio is too high, you're likely wasting the use of your cash and resources by making them too idle. A good business analyst will determine the amount of excess working capital/cash that is funding the income statement profit versus normal operations. I have seen many multi-generational businesses with excessive working capital, but upon quick analysis of a profitable income statement, I saw a generous financial income derived from discounts from vendor early pay, interest income and low interest expense. It was a poor business operation masked by the working capital wealth of the company.
Income Statement
Your income statement should be a validation of what is going on with your jobs in the field, assuming that your opening and closing balance sheets are correct. Your income statement should be in the same category as your job-cost comparison to your estimates, and it should be in a format that highlights whether components of your business are operating according to plan. In order for your income statement to be used as the effective management tool and "sanity check" that it was meant to be, the following components must exist:
- It must be an accrual, not cash basis statement. Accrual means you have recorded all your receivables and debt inclusive of payables on the balance sheet.
- It must include not only numbers next to the expense categories but also percentages of revenue next to the number.
- The only revenue in your top line should be job revenue. No interest income, rebates or sales of equipment should be included.
- The costs of construction must be detailed to identify construction labor and payroll added costs, subcontractors, materials, equipment rentals, revenue-driven liability insurance, superintendents' costs or other direct costs of construction as detailed in the estimate and tracked in your job cost reports. Some or all of these are your "direct job costs". Labor, materials, subs, equipment rental, permits, direct insurance, etc., are at a minimum included on your job cost reports, regardless of software, and in the estimate.
- Indirect construction costs such as mobilization, trucks, pagers, cell phones, supers, trailers, etc., may be what you call "general conditions." Define what you mean by "general conditions," and categorize these costs separately on your income statement. This will allow you to see if the general conditions you are using in your estimates are making or losing money.
- Categorize your preconstruction costs of estimators and bidding/selling expenses separately on the income statement. Divide the number of bids or estimates produced into this total, and see what it is costing you to bid. Add that to your bid-to-award ratio and you may find that not only are you wasting money in bids you'll never get but also how much you are wasting.
- Keep the office and support staff under an administrative expense category. Be sure to allocate the workmen's compensation insurance, vehicle and equipment insurance, depreciation, payroll taxes, benefits, safety and training to the indirect or general conditions as appropriate.
- Show purchase discounts and interest income as "other income" after computing profit or loss from the construction operations. These are financial incomes which are earned due to ownership, equity and working capital, not from operations.
- Compare the percentage of gross profit from jobs completed and jobs in progress to your income statement. This should be done before general conditions are deducted when you compare the percentage of gross profit. Be aware of additional profit that you may earn in gross profit from the labor rate that you use in estimating versus your labor rate posted to job cost sheets or categorized on your income statement. If you use your own equipment in construction in lieu of renting it, separately analyze these costs to see if you are making or losing money in this regard. If you are earning a profit from this, that's great, but it will likely distort the gross profit from construction if your estimate utilized a fair market rental rate.
Meet regularly with your outside accountants if they are construction knowledgeable or your construction business advisor and/or your controller on a monthly basis to review your balance sheet, income statement, working capital, source and use of funds statement and completed jobs/estimated costs to complete schedules. It establishes control in your business. It also helps create the "sanity" of profit, helps avoid the "insanity" of making the same mistakes over and over again and prevents you from losing profit-or your construction business itself.
Anthony Burruano, joint managing director of Burruano Group, specializes in helping businesses increase their profit, cash flow and sales. He is a nationally known business consultant, speaker and a contributing author to several trade publications. For more information, visit www.burruanogroup.com or call 866.709.3456.
<< Start < Prev 1 2 Next > End >>
|
