Week 4 – Leverage Your Insights – Reporting For Results and Profit• Q&A last week’s lesson

• Reports Review- understand the insights

• Best Practices, Basis, Checks and Balances, WIP Adjustment

• Reports Recommendation – which reports your contractor should be looking at and when

• Reports Customization and Short Cuts – how to customize certain reports for maximum insight and efficiency

• Speculative and WIP accounting processes lesson

• Q&A

Types of Reports• “Forest” Reports – Big Picture: Profit and Loss (actual vs.

budget), Balance Sheet, Cash Flow Projection, Job Estimates vs. Actuals Summary, Job Profitability Summary

• “Tree” and “Leaves” Reports – Job Estimates vs. Actuals Detail, Job Profitability Detail, A/R Aging, A/P Aging, Costs to Complete Job, Time by job detail, Job Costs Detail, Open Invoices, Unpaid Bills Detail

Memorizing Reports • Memorize custom reports

• Memorize regular reports into “groups” with dynamic dates

• Run Multiple reports

Recommended Weekly/Bi-Weekly• Cash Flow Projection

• “Cash Availability” – Modified Balance Sheet

• As Needed for paying bills/invoicing: Job Estimates vs. Progress Invoices, A/R Aging, A/P Aging, Unpaid bills by Job

• As Needed for Job Analysis: Job Estimates vs. Actuals Detail, Job Profitability Detail, Costs to Complete, Time by job detail and/or Summary, Job Costs Detail

Recommended Monthly Reports• Profit and Loss (Budget vs. Actual is ideal)- adjusted for

over/under billing

• Profit and Loss by Month – optional

• Profit and Loss Previous Year Comparison – optional

• Profit and Loss by Class – if applicable

• Balance Sheet

• Balance Sheet vs. Previous Year - optional

Cash vs. Accrual Reports• Cash Basis Reports = Income recognized by customer pay

date, costs by bill paid date

• Accrual Basis Reports = Income recognized by Invoice Date, Costs by bill date

• Accrual basis is the best way to analyze your business financially for current performance – with adjustments for over and under billing

Best Practices before monthly financials

• Always reconcile bank and credit card accounts before running monthly financials and doing WIP adjustments

• Unbilled costs by job – make sure all costs that should be are assigned to jobs

• Analyze A/R and A/P for accuracy

• Run Profit and Loss Unclassified if applicable

• Perform WIP analysis and adjust for over/under billing

WIP Analysis and Adjustments for Over/Under Billing

• If you enter estimates line by line at cost – run Job estimates vs. actuals summary for the period• If you enter your estimates at line by line sales price,

know your mark up and run Job Profitability Summary•Use WIP worksheet to perform analysis and do a

Journal Entry to account for Over/Under Billing for the period- and REVERSE so you can start fresh the next month

Leveraging Your Insights – Best Practices• Use Accrual based reports and enter bills, credit card charges and

customer invoices on accrual date

• Know your Overhead costs vs. Job-related costs

• Estimate at actual cost, especially for labor, then apply your mark up

• Indirect job costs should be counted as overhead expenses

• Sole proprietors be sure to account for your “salary” when projecting overhead as well as your contribution to jobs

• Your Net profit should be 8-10% in addition to salary

Leveraging Your Insights – Projecting Volume• Use current volume if your business is well established

• Use worksheet to calculate the formula below

• Calculate your compensation requirements -how much do you need to pay your personal bills, save 10% and pay your taxes (25-30%)

• Subtract your salary if included in overhead costs, and/or the expected value of your time working on jobs, then divide by 8%-this should be your approximate sales volume

• Example: $60k personal bills+ 10% $6k savings + 30% $18k Taxes= $84k – Salary in overhead $35k, work on jobs $20k = $84k-$55k= $29k/8%= $362k is projected volume

Leveraging Your Insights – Projecting Overhead• Overhead % formula is Overhead/ Sales

• Overhead costs are often the easiest to project (use worksheet), especially if you have an established business

• Overhead costs, except for indirect job costs, are fairly fixed

• Overhead costs vary by industry, there is no fixed rule, but it’s usually between 20-45%. Remodeling and service based businesses often have a higher overhead than new construction.

• You should include a salary for owner in overhead at 6-8% of sales

Calculating your Mark up• Project Sales Volume

• Project Overhead Costs

• Project profit at 8-10% of Sales Volume

• Sales Volume $360k, Overhead $100k, Net Profit 10% = $36k

• Add Overhead and Profit $136k, Subtract from Volume to get job costs: $360k-136k = $224k is projected job costs

• Divide Sales Volume by Job costs: $360k/$224k = 1.61 Markup (61%)

Adjusting Factors• Sales Volume: Either by raising your current mark up or

increasing the number of jobs. Increasing the number of jobs will also increase your overhead, and your job costs.

• Mark up: If this mark up comes out a lot higher than expected or what you are charging, you probably are not charging enough.

• Profit: Profit is where most people sacrifice, but don’t do it! First, if all you are going to make a wage, why take the risks or the headaches of your own business?

• Overhead – In my experience, overhead is the most challenging to reduce.

Typical, Bad Mark up formula• Sales price = Job Costs + Overhead + Profit

• $224k+ 28% overhead $63k + Profit 10% $22k = Sales Volume $309k

• Vs. Sales Volume $360k – how did we lose $51k?!?!

• The overhead and profit is calculated on job cost not sales volume

• Even if you base the profit on the job cost plus overhead, overhead you are starting with overhead calculated on cost not volume

Mark Up vs. Margin• Mark up is the relationship between COSTS and Sales

Price/Volume• Mark up formula = Job Costs divided by Sales Price (224/360=62% Mark

up)

• Margin is the relationship between PROFIT and Sales Price/Volume• Margin formula = Gross Profit (sales-COGS) divided by Sales Price (360-

224/360 = 38% Margin

• It’s important to know your margin because it’s easy to check our margin by looking at the P&L report

Speculative and WIP Project Accounting• Map your Items to WIP Accounts: Cost= WIP Construction Asset,

Revenue = Unrecognized WIP Revenue

• Add other items/COGS accounts: Land/Lot Purchase, Closing Costs, Real Estate Commissions, Property Taxes and Insurance

• If you do both WIP and Contract jobs, you can have 2 item lists, or make adjustments to push in or pull out of WIP

• If you do both - Consider using classes so you can run a profit and loss for speculative vs. contract jobs to see which is more profitable

• Post deposits direct to loan accounts

• Closing Jobs when complete or sold