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Checking The Financial Fitness of Your Company

Michael Stone | Business Articles
Profit and loss statements provide a good picture of where you stand financially, but they will not tell you why. Your P&L is a reflection of numerous small decisions. Lets look at some things that can be done to strengthen your P&L statement.

 

Operating Capital Reserve Account
The second most important thing you can do for your company is to establish and regularly contribute to an Operating Capitol Reserve Account (OCRA). This account can help deal with a long list of bad events that can happen to you. With a healthy OCRA, you dont have to enter a contract with a difficult customer just to keep money coming through the door. You do not have to take a job for cheap just to keep your people working or to pay a tax bill that wasnt paid correctly. You can replace the engine or transmission in your truck, repair a power tool, and keep your business running smoothly.

Your OCRA can be established simply by taking one to four percent off of each check that comes in the door and putting it away for an emergency. And until you start it, you are always going to have that what next cloud hanging over your head. Start it today, no more excuses.

 

Employees producing minimum volume.
In our Markup and Profit book are two charts showing the production needed per employee for a company to remain profitable. We often have companies call us that are doing $300-$400,000 annual volume, with six or more employees. Keep your eye on those production charges. If your production is more than five percent under the chart for volume produced per employee, its time to lean-up and clean up immediately.

 

We know of no warning signs that appear before extra overhead expenses bite you in your assets. But when it goes bad, it goes bad quickly. Make sure youre producing the correct volume per employee or youll be hearing requests from a number of sources (including employees) asking for money you dont have to pay your bills.

 

Cash flow and contracts
One-third down, one-third pro-gress payment and one-third final payment equals POOR CASH FLOW. A rule of thumb is to be paid on each job every two weeks. Three weeks is okay in some circumstances, but four weeks is too long. You are not a bank; do not act like one. Its the wise and prudent contractor that works out of the customers pocket book.

 

Have your payment schedule clearly outlined on your contracts. When you have the contract ready for signature, remind your customer of the payment schedule. John, Mary, before you sign this agreement, I want to review one more time the payment schedule for this job. Then talk through the payment schedule before you say, If the payment schedule, and all other matters are clear on this agreement, please sign right here. Let them know right up front, before they sign, you are serious about being paid and on time. Goals and sales/production charges. If your production is more than five percent under the chart for volume produced per employee, its time to lean-up and clean up immediately. We know of no warning signs that appear before extra overhead expenses bite you in your assets. But when it goes bad, it goes bad quickly. Make sure youre producing the correct volume per employee or youll be hearing requests from a number of sources (including employees) asking for money you dont have to pay your bills. Cash flow and contracts One-third down, one-third pro-gress payment and one-third final payment equals POOR CASH FLOW. A rule of thumb is to be paid on each job every two weeks. Three weeks is okay in some circumstances, but four weeks is too long. You are not a bank; do not act like one. Its the wise and prudent contractor that works out of the customers pocket book. Have your payment schedule clearly outlined on your contracts. When you have the contract ready for signature, remind your customer of the payment schedule. John, Mary, before you sign this agreement, I want to review one more time the payment schedule for this job. Then talk through the payment schedule before you say, If the payment schedule, and all other matters are clear on this agreement, please sign right here. Let them know right up front, before they sign, you are serious about being paid and on time.

 

Goals and sales/production meetings
Between November 15 and December 31 each year, do your budget for the coming year. If you didnt do one last winter, do it now. This helps establish what you need to sell, build and collect, and by when. Then, make it happen or the exercise is pointless. If you do not sell and then produce a volume of business to meet your goals, you cannot pay your bills. Dont be one of those who let things happen rather than making things happen; when the business fails, they wonder what happened?

 

Eight percent net profit
Eight percent is important. When you make and maintain 8% net profit, your focus can shift to running your business. Jobs done that do not generate eight percent net profit are jobs with more problems associated with them, and a distraction to the owner. Trust me on this, you do not need to trade dollars, you need to be making an eight percent profit. This will allow you to pay your bills and change the way you run your business.

 

Stay focused on what you do best
Many contractors carry a set of blue tights in their vehicles. They wear them with the blue shirt with the Big Red S on the chest. They can do anything . . . leap tall buildings, landscape a backyard in two days, install landscape lighting and an irrigation system in three hours. Because they want to be Supermen, many contractors never focus on what they do best. Have you ever seen advertising from a company stating, We specialize in, followed by a laundry list of 1015 specialties landscaping, pools, general contracting, ad nauseum. Where is the specialty? Think about this: who makes more money, the general practitioner or the brain surgeon?

 

Focus on becoming the best company in your area for one thing. When you say we specialize in whatever, make it mean something. Get focused and you will see an increase in your profits.

 

And finally, do what you need to do to make the phone ring.

 

When business slows down as it has over the last year-and-a-half, focus on what it takes to make the phone ring. Your first contact with potential new customers or old customers will almost always come by way of the phone.

 

Editors Note: Michael Stone, with more than three decades of experience in the building industry, wrote the book Markup and Profit. Stone offers coaching and consulting services for construction companies. Email: michael @markupandprofit.com. 888-944-0044 or www.markupandprofit.com.




 
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