Whether or not you survive in business is really kind of
simple. You must take in more cash than you pay out. Yet, most
contractors
aren’t even sure if they are making money at all. Often, by the time they figure
it out, it is too late to make adjustments, causing failure.
At a coaching session I attended, speaker
George Hedley made
the statement that he is convinced that 90 percent of construction business
owners doing under $10 million in sales don’t know how to read a profit and
loss (P&L) statement. Over the years, I have come to believe that George
could say that for many business owners who do more than $10 million in sales
per year, too.
Many of us grew up in the trade, so we know how to build
buildings. However, when it comes to being a businessperson, we get lost. It
was not until my company was doing more than $10 million in sales and switched
to accrual accounting that I hired a CFO to show me how to read a P&L, and
to teach me what effect it had on my operations. Of course, business was much
easier back then as the economy was good and the competition wasn’t as
educated. Hell, I was running my own company doing more than $10 million in
sales a year. I was making money without really knowing how or why I was
prospering. That won’t work in today’s business climate.
Here’s a wild card many contractors get surprised by: A
company can make money and still go bankrupt. Sounds scary, doesn’t it? You bet,
and it happens. This can happen if one does not watch his debt load and other
expenses, compared to his profits. Let’s say you owe money for a forklift,
truck and scaffolding. Then you have rent, taxes, debt interest, owner
distributions and other expenses that cost you $12,000 per month or $144,000 on
the year.
At the end of the year, you are feeling alright as your
P&L shows you earned $70,000 for the year (before depreciation and interest
are subtracted). However, the real picture is that you just had a year during
which you made $70,000 in profits the way good ole Uncle Sam looks at it, while
losing $74,000 in cash paid out from your bank account. Think about it: There’s
$144,000 going out the door in payments/expenses, and $70,000 in profits coming
in to cover your costs. A total of $144,000 minus $70,000 equals $74,000 less
cash. It doesn’t take many years like this to sink a company.
Several years ago, we started teaching all our managers how
the P&L affects our operations and even started paying them based on the
monthly P&L outcome. They get their bonuses (or incentive, I like to call
it) based on three factors of the monthly P&L: total sales collected, gross
profit and net profit.
It is amazing how much a company can benefit by letting
everyone in management know how important these three factors are to the
success of the company. And, when part of their income is based on the outcome
of the P&L, it becomes important to them to start thinking more like
business owners.
The good news is, it is not a cardinal sin to not know how
to read a P&L statement. However, it is a sin not to have an accountant on
board who can explain your P&L to you, whether this person works inside
your company or is an outside accountant. The P&L should be done each month,
and a meeting should be held to see how your company is doing financially as
well as what moves you should make next.
If you wait until the end of the year to find out how your
company is performing, it could be too late to change course and take
corrective actions. Also, don’t forget to ask your accountant for a cash flow
statement to ensure you are taking in more money than you are paying out.
Remember, profits don’t equal cash, and, to survive, we must take in more cash
than we pay out.
Damian Lang owns and operates
four companies in Ohio. He is the inventor of the Grout Hog-Grout DeliverySystem, Mud Hog mortar mixers, Hog Leg wall bracing system and several other
labor saving devices used in the masonry industry. He is the author of the book
called “RACE—Rewarding And Challenging Employees for Profits in Masonry.” He
writes for Masonry Magazine each
month and consults with many of the leading mason contractors in the country.
For information on how Damian can help make your jobsite more profitable using
his equipment and systems, email him at dlang@langmasonry.com or call 740-749-3512.
