Archives for January 2020

Cash Flow vs. Accounting 

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Many businesses rely on their P&L to gauge how well their business is doing, but that’s a bad idea. While there’s a place in your business for your P&L statement, it’s not in running your contracting business on a day-to-day basis. Your P&L will lie to you every day of the week because it’ll tell you you’re making money, even if you’re not.

If you really want to know what’s happening in your business, then you need to know the differences between cash flow and accounting. Let’s examine them. 

The Two Big Differences 

As a business owner, there are two basic differences between cash flow and accounting that you should know.

Difference #1: Depreciation vs. Equipment Replacement Costs 

The first major difference is depreciation versus equipment replacement costs, and what that means for your business. Depreciation has to do with accounting. It relates to what you pay for a piece of equipment from one year, two years, even three years ago. Depreciation is exclusively an accounting number that provides information on the reduction in the value of an asset over time since its first purchase. It does not actually have any direct cash impact. Equipment purchase, on the other hand, is tied to cash flow since your business has to spend money in order to get an asset replaced. This purchase has a direct cash impact, whereas depreciation does not. 

Difference #2: Loan Payment Numbers 

The second major difference is how loan payments are handled. If you have a $500 monthly loan payment and of that $500, $100 is going toward the interest and $400 is going toward principal, what shows up on your P&L statement? It’s not the entire $500; it’s only the $100 in interest. Right there, you’re dramatically under-reporting the expenses in what it costs you to run your business. If the $400 isn’t an expense, it shouldn’t be showing up on your P&L statement. 

Making Sense of It All

If you want to know the truth about how your business is doing, you can’t just look at your P&L statement and expect it to be true. You have to know the difference between cash flow and accounting, and run your business accordingly. Accounting and cash flow numbers show up completely different. And while your first instinct may be to assume that there’s a discrepancy, that’s not necessarily the case. Differing values for accounting and cash flow do not automatically mean that one is correct while the other is wrong. It simply means that the two are calculated differently, and knowing this difference can help you analyze your business’s financial performance and the flow of expenses better. 

Know How Well Your Business Is Doing! 

Ultimately, knowing as much as you can about your business’s finances enables you to make smart decisions so you can grow your contractor business. If you’re asking yourself, “How can I grow my contractor business?”, you can start today by watching our free webinar!

5 Things Your Business Should Review Monthly 

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Running a successful business takes more than just the provision of quality services; it also takes efficient management and organizational skills. Whether you own a large-scale business or a small startup, you’ll constantly find yourself having to deal with tons of data and financial statistics. Once you get the information, you’ll have to make sense of it all to verify that your business is profitable. Analyzing data and financial reports every month is an important part of running a successful effectively, no matter the size or the scope. A comprehensive analysis of this data provides key insights relating to your business’s performance within the market in comparison to its competitors. It also alerts you to its financial state and other strengths and weaknesses that may impact future performance significantly. Let’s take a look at the 5 things your business should review monthly. 

The Big 5 

1. P & L Statement  The first thing you need to review is your P&L (profit and loss) statement, also commonly referred to as your income statement. This statement gives you a comprehensive overview of your company’s total revenue and expenses incurred during the month. It provides insight into the net income gained or lost by your company so you can have accurate data and determine the overall profitability of your business. When you review your P&L statement at the end of each month, check whether any accidental errors have been made or if something has been overlooked to avoid any future hassle.  2. Balance Sheet  Your balance sheet lists your business’s assets, liabilities, and owner equity. Your balance sheet can easily show you the scope, organization, and direction of your business’s financial health, all in one place. When you review it every month, you should understand exactly what it’s telling you. During your review, if you notice there are significant changes that don’t make sense, get an answer to it — fast. The more time you put into your balance sheet, the more helpful information you’ll be able to glean from it, which is crucial if you’re hoping to grow your business in the future. Your balance sheet should always be in balance.  3. Payables Report  Running a business also means paying bills and keeping track of credit expenditures. Your payables report should represent all your cash expenditures while also letting you know who you owe money to at a glance. There are many contractor business growth strategies that you can use to your benefit, but it all starts with tasks like monitoring your payables report. Stay current with all your suppliers and review the payables report at the end of each month, and keep your payables report in the first three columns, maximum. 4. Receivables Report It’s pretty difficult to keep your payables current if your customers aren’t paying you. That’s why you have to review your receivables report every month. Your receivables report indicates unpaid invoice balances and the duration for which they’ve been outstanding. This report, which should be kept in the first two columns at most, lets you identify invoices that are open and helps you zero in on slow-paying clients. Reviewing this report each month will allow you to keep track of all the money you are owed so you can get paid and keep running your business.  5. Hill and Valley Account  Budgeting as a business owner is hard enough as it is. With a hill and valley account (your business’s savings account), you can get through even the hardest months of income fluctuation. Every month, you should review your hill and valley account, checking that it’s sufficient in terms of getting you through tough financial periods your business may face in the future. Having this money in tough times can help your business survive and keep you in good financial standing overall. 

Focus On Long-Term Success! 

Businesses that stand the test of time show a remarkable tendency toward effective finance management. If you want to focus on long-term success, then you need to review the principal pieces of your business’s financial information every month. Knowing how to run your business starts with spending the time and money to invest in yourself and your business from the start. At Grandy & Associates, we offer contractor business training and contractor business growth strategies to help you build a more profitable business.  Change the course of your business and start learning the art of business management today by attending our free webinar or signing up for our monthly business tips email newsletter.

Techs Are Competitive By Nature

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by Tom Grandy, Founder

Have you ever watched little boys play baseball, basketball or football?  If so, you noticed one thing every time.  They are competitive by nature.  For the most part, they were not told to play hard or give their team their best.  It’s nature, they are competitive by nature.

Guess what?  When little boys grow up nothing changes, they are STILL competitive by nature.  They want to win and they want to do better than the other guys on their team, and for sure the guys on the other team.  That same competitiveness carries over into the workplace.  Service techs are competitive by nature.

Now, being competitive implies there is a goal to reach.  When participating in school sports the goal was easy to define.  The goal was to win the game and/or the championship.  The goal was in plain sight.  However, when it comes to the workplace the goal can sometimes be less clear. 

Without a clear goal in sight, what is the incentive to do your best?  Sure, we should all do our best at whatever we do, but let’s face it.  If there isn’t a specific goal to work towards, few of us excel every day.  However, if a specific goal is set and performance is measured against that goal, what happens to productivity?  It increases.  If there is a reward involved when it comes to meeting or exceeding the goal, the competitiveness kicks in.  Service techs need a goal to shot for and they need a defined reward for meeting or exceeding that goal.

Consider measuring the techs gross dollars earned per billable hour as defined in the lead article.  Meeting and/or exceeding those specific goals will be a win-win for the tech as well as the company.

Is your goal to become an owner one day?  Is so, now would be a great time to start learning the “business side” of business.  Check out Grandy & Associates Online Training.  There are all kinds of programs designed to help you grow and prosper no matter what your job description is.  The modules are normally $39.95 each but the Website Special this month is only $29.95 per module.  Check out the Online Library and see what program best fits your needs.  Check out this month’s Website Special . 

Who Is Your Go-To Tech?

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by Tom Grandy, Founder

There are 30 seconds left in the game.  Your team needs a three-pointer to defeat your arch rival from across town. Coach calls a time out.  The question?  Who is going to take the last shot?  He could tell whoever is open to take it but more than likely he will ask Billy to try to take the last shot.  Why?  Statistics.  The coaches have been keeping records the entire season.  They know statistically who is the best three-point shooter.  As you might have guessed Billy has scored more three-pointers than anyone else and also has the highest percentage of made shots.  The choice was easy if stats are being kept.  Billy takes the last shot.

Let’s take a look at YOUR service techs.  Which one is the most productive in terms of dollars generated per billable hour?  Do you know?  If not, you should because it drastically affects the Service Department’s profitability.

The first step is to determine a goal.  How much “should” each service tech be bringing in per hour to hit your gross sales goals.  To determine that, you will need three pieces of information.

What is the current hourly rate you are charging the customer? Let’s assume it $145/hour.

What is the average cost of materials sold per billable hour? This varies by trade but for the HVAC industry, it’s about $20/hour in part sales (cost).

What is the average parts markup for parts in the Service Department? I realize it is sliding scale, but in general the average parts markup is usually around 100%.

Armed with the above information, we can now determine what each service tech should be bringing in per billed hour.  The number is $185/hour for each hour they bill the customer ($145 + $20 parts cost + $20 parts markup = $185).  Now we know what the goal is for each service tech. 

The question is, who is hitting that goal and who is not?  For this, we will need the gross dollars billed per tech for the month and the actual billed hours charged the customer. 

Note:  these are not the hours turned in on his time card, these are the hours he was able to actually charge the customer during the month.  Do the math.  Look at the gross dollars brought in for a period of time.  It might a week, a month or longer. Let’s look at a month for Sam, Ed and William.

Sam: 

He billed the customer $13,200 in gross dollar and he worked 77 billable hours. 

Note: these are not the hours he turned in on his time card, these are the hours he was able to charge the customer during the month. 

Revenue brought in per billable hour = $13,200/77 billed hours/= $171.43/billable hour

Ed:

Ed billed the customer $16,325 in gross dollar and he worked 83 billable hours. 

Revenue brought in per billable hour = $16,325/83 billed hours/= $196.69/hour

William:

William billed the customer $11,835 in gross dollar and he worked 74 billable hours.   

Revenue brought in per billable hour = $11,835/74 billed hours/ = $159.93/hour

Look at the three service techs.  Which one is the top performer?  Even though the number of billed hours varies by tech, it is pretty obvious that Ed is the Service Department’s top performer.  He is the go-to guy.

Armed with this information, what kind of decisions can be made:

If one of the service techs needs to be transferred to the Installation Department for a day, which tech needs to go? The answer is to send the lowest producing tech, which would be William. 

How would profitability be affected if Ed is transferred to Installation for a day instead of William? Ed bills out at $196.69/billed hour, while William bills out at $159.93/billed hour.  That is a difference of $36.76/billed hour.  If Ed is transferred and William is kept in Service, and 4 hours are billed out that day, it would have cost the company $147.04 ($36.76 x 4 billed hours = $147.04) in gross sales.  This doesn’t need to happen very often for the gross lost dollars to really mount up.

If one of the three techs needs to be laid off for a period of time, who goes? Again, the lowest producing tech needs to go which is William.  The last to go is Ed.

Once the goal is set, which in this case is $185/billable hour, it can be a pretty simply process of setting up a reward system based of productivity.  Keeping a few statistics to make decisions can scientifically affect the bottom-line profitability of the Service Department. 

Are you interested in being a better owner or manager?  If so, check out Grandy & Associates Online Training.  There are all kinds of programs designed to help you grow and prosper no matter what your job description is.  The modules are normally $39.95 each but the Website Special this month is only $29.95 per module.  Check out the Online Library and see what program best fits your needs.  Check out this month’s Website Special .