January 2013: Business Building

January 2013

Business Building

Nine Numbers You Need To Know

By George Hedley

It seems as if business owners hope hard work will eventually make them some money. But the odds they hit a jackpot, win the lottery, or inherit a fortune to create profits are better than continuing to run their businesses the way they do. It takes focus on nine necessary numbers to keep you headed in the right direction.

1. Know your profit numbers I conducted a survey of more than 2,500 contractors and discovered less than 40 percent had specific written net profit targets. Every year, sit down with your management team and decide how much gross and net profit you want to make in actual dollars, not percentages. To determine the specific profit number you want to hit, look at your equity and projected overhead for the year. Then look at the risk you take to operate your business, and decide how much profit you want to make based on the return you want to make.

2. Know your equity numbers Equity or net worth is the actual value of your company or the sum of your total assets minus your total liabilities. It’s found on the bottom of your balance sheet or financial statement. Every business owner’s top priority is to grow the net worth of their company. If your company doesn’t grow in equity, it can’t go out and do more work, increase bonding capacity, or grow.

3. Know your overhead numbers Making a profit starts with knowing how much money you need to make to cover indirect, fixed cost of doing business or overhead. At the beginning of every year, calculate your annual overhead expenses you anticipate spending to operate your company. Then track it every month to make sure your actual expenses do not exceed your budget.

4. Know your sales numbers Track your sales numbers monthly to make sure you are on target to hit your annual sales, overhead and profit goals. Only the top contractors can make necessary adjustments to their estimating and bidding strategy, customer selection, project management and field operations as the need arises.

5. Know your job cost numbers Sit down with your accounting manager to get an accurate cost for every employee and piece of equipment you own. For labor, include all taxes, insurance, workers’ compensation, health insurance, vacation, union dues, overtime, small tools, training, pension, profit sharing, and other benefits you provide. Next you must have an accounting system software to track your actual job costs by cost code or work task. From these printouts, you can verify the numbers to use for estimating new projects.

6. Know your contract numbers Top construction business owners know their contract numbers, including completed and current jobs in progress. You should have a report listing all completed and current projects, including job name, start date, project manager, superintendent, foreman, contract amount, estimated final cost, bid mark-up, actual final markup, variance, costs to date, percent complete, profit to date, amount earned to date, amount billed, estimate cost to complete, and contract balance.

7. Know your receivable numbers You can’t make money unless you collect what you’re owed. Stay focused on collecting what’s owed by getting an updated weekly accounts receivable aging report to review showing all of your outstanding invoices and due dates.

8. Know your liability numbers Know your outstanding liabilities and debt. Create a report listing out all of your debts, liabilities and balloon or one time payments due in the near future. Don’t forget to include your line of credit, other credit loans, equipment loans, future tax payments, or real estate loans.

9. Know your cash numbers Get a report of your cash position every week and include the following: bank deposits, cash in bank accounts, weekly payroll cost, weekly equipment cost, weekly overhead costs, and investments.