Built to Build: Blog
PERCENTAGES: THE BEST WAY TO ANALYZE YOUR PROFIT & LOSS STATEMENT
ARE YOU UNSURE WHAT YOUR FINANCIAL REPORTS MEAN?
Most construction business owners struggle to understand Profit and Loss statement analysis. They depend on their bookkeepers or CPAs to interpret what the numbers mean.
Properly interpreting your financial reports takes time and can be confusing.
HOW TO TAKE ON PROFIT AND LOSS STATEMENT ANALYSIS WHEN YOU HAVE 17 OTHER THINGS TO DO
If you’re like most construction business owners, you wear seventeen different hats in your business on any given day. One day you’re playing Project Manager, then next day you’re playing the role of salesperson. If you’re lucky, you might get a few minutes to play the role CFO, but you’re not really sure what numbers you should be analyzing.
That’s why Rule #2 of the Profit First for Contractors framework is so powerful.
PROFIT FIRST FOR CONTRACTORS RULE #2 – PLAY THE PERCENTAGES
Every dollar that comes into your business will be “spent” on something. Some of those dollars will be spent on your Cost of Goods Sold (COGS). Some of those dollars will be spent on Expenses, and some of those dollars will be “spent” on profit and taxes.
The actual dollar amounts spent on these items will vary as your construction business grows.
If you understand how to play the percentages of your construction business, then you will be able to identify trends, make projections, and take specific actions to ensure profitability.
Remember Rule # 1 of the Profit First for Contractors framework – your income is 100% of your budget.
The money that comes into your business is all the money you have to spend on the business. If you spend more than 100% of the money that comes in, then you will have problems. That’s pretty straightforward.
But, when it comes down to Profit and Loss statement analysis, how do you determine how much of that 100% should be spent on each area of the business?
You use PFC Rule #2 – play the percentages.
HOW TO PLAY THE PERCENTAGES IN PROFIT AND LOSS STATEMENT ANALYSIS
Take a look at your PandL from last year, and calculate the percentages of total revenue for each of the four areas: Income, COGS, Expenses, and Net Profit.
($ of COGS / $ of Total Revenue) x 100% = the percentage of each dollar of income that was spent on COGS
Calculate this simple ratio for the three other areas of your PandL – Income (this is always 100%), Expenses and Net Profit.
Once you have calculated these percentages for the last calendar year, then you are ready to play the percentages.
Break down these percentages for each quarter of last year and compare these quarterly percentages to your current quarter.
Now you will start to spot the trends in your construction business, and you’ll be able to answer some questions about how your business operates.
QUESTIONS THAT CROP UP DURING PROFIT AND LOSS STATEMENT ANALYSIS
Question: How can we decrease the COGS percentage?
Answer (A) – If the income stays the same, we have to decrease the number of dollars spent on COGS.
Answer (B) – If we spend the same dollar amount of COGS, but sell the same amount of COGS for a higher price, then the percentage of COGS (as it relates to the total income) will decrease.
Question: If we spend more money on our Expenses, will the percentage of our Expenses increase or decrease?
Answer – Money spent on Expenses should not only drive the efficiency of your construction business (increased margins), but also drive your overall sales. You may spend more dollars on your Expenses this year than you did last year, but the result often leads to better performance of the business, therefore reducing the percentage of incoming dollars spent your Expenses.
Question: What are the percentages for a healthy construction business in our niche/market?
Answer – It depends. But once you start playing the percentages, you’ll know what works and what doesn’t work for your construction business.
OTHER QUESTIONS TO ASK
What was our percentage for _________ (fill in the blank) during this time period last year?
Why is it different this year?
What changes can we make to keep/increase/decrease the percentage of ________ (fill in the blank)?
Where do we need this percentage to be next month/quarter/year?
PLAYING THE PERCENTAGES PROVIDES A HIGH-LEVEL FINANCIAL ANALYSIS
Rule # 2 provides you with a quick, high-level financial analysis of your business for any given period of time.
When you start viewing your income in percentages, then you’ll spend less time worrying about the details. You’ll know where you need to take action and how that action will change your margins.
Rule #2 provides immediate feedback about your business when you compare it to historical data.
You’ll spend less time worrying about numbers and more time focused on making appropriate changes.
LEARNING TO PLAY THE BUSINESS GAME WILL GROW YOUR CONFIDENCE AS A CONSTRUCTION BUSINESS OWNER
Business is a game. Learn to play the game by playing the percentages.
Knowing your percentages will increase your confidence as a business owner, streamline your systems, and increase your profits.
JOIN THE BUILT TO BUILD ACADEMY® WAITLIST
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Join the waiting list, and secure your spot when the next cohort starts.