Imagine you're piloting an airplane when suddenly the entire instrument panel goes dark. You have no indication of air speed, altitude, fuel status and all the other information needed to get to your destination safely. A scary thought, huh?
Yet, a comparable situation prevails within the vast majority of PHC companies in this industry. A Profit & Loss Statement (P&L) is the instrument panel for a business. The average small contracting firm does not produce one at all, except maybe once a year when his accountant puts one together at tax time. That's hardly worth the paper it's printed on. It's like an instrument panel that comes on for only a few seconds at the end of a cross-country flight.
Even larger businesses in our industry often fail to produce a P&L in a timely manner. Their CEO may gain access to the company's financial data only on a quarterly basis or even less frequently. That's not good enough. It doesn't do much good to have someone sound an alarm after a tornado passes.
A frequent P&L can serve as a warning signal that something has gone haywire with your business. That's why in our business, I receive a P&L each month, within 12 days after the previous month. Ideally, I'd like to receive one the next day, but we're not perfect.
Garbage In, Garbage OutA P&L is only as good as the data inputted. Failure to collect sufficient financial data is the main reason why so many of this industry's contractors fly blind.
For a P&L to be meaningful, you need to have detailed job costing procedures that break out labor, material and other direct costs, and indirect costs (overhead). The more detail, the better. If, for example, your monthly P&L shows a sudden decrease in gross margin for the jobs you do, that tells you to do some investigation. It may be simply an aberration stemming from a few particularly troublesome jobs. Or, it may be a signal that your company is not holding the line on pricing or expenses. In that case, a timely P&L gives you a chance to investigate and adjust your business practices.
The main reason why most of this industry's contractors fail to produce timely P&Ls is they do not think like businessmen. They are so busy chasing their tails in the field they can't find the time to sit back and analyze what's gone on, what they're doing and how to do it better.
Many practice what's best described as "checkbook accounting." That is, they keep writing checks from the company account until the money runs out or close to it, then scramble to sell their labor at pitiful rates just to get a revenue stream moving again. They still think of themselves mainly as plumbers rather than as owners of a plumbing business.
In particular, they don't understand their costs of running a business. They pay no heed to cost breakdowns. And, if you don't know what it costs you to produce an hour of labor, you can hardly expect to price that service correctly. Instead, most contractors price their services based on the going market rate without a clue whether that rate is sufficient to support their business expenses and a reasonable level of compensation for themselves and their employees.
BrainworkIf you get into the habit of meticulously tracking your costs of doing business, producing a P&L is relatively easy. Virtually any computer spreadsheet program can be rigged to produce a P&L. First, however, there needs to be a commitment to collect the information, plus the wherewithal to use it effectively to manage your business rather than be imprisoned by it.
There is nothing mysterious about the numbers crunching side of any contracting business. Anyone with the brains to become a skilled craftsman has enough intelligence to keep track of his financials. It's a question of will and attitude.
Keep your eyes fixed on that instrument panel. The information will keep you from crashing.