Built to Build: Blog
THE #1 RULE YOU NEED TO HACK YOUR PROFIT & LOSS STATEMENT
ARE YOU SPENDING MORE THAN YOU RECEIVE?
If you spend more than 100% of your income, then you are going to have problems in your construction business.
I know it sounds simplistic, but many construction business owners violate this fundamental principle of financial planning. They spend more money than they receive.
DEMYSTIFYING THE DREADED PROFIT AND LOSS STATEMENT FOR CONSTRUCTION BUSINESSES
The Profit and Loss Statement (PandL) represents how a business generates a profit, but it doesn’t tell the whole story.
That’s why it’s confusing and frustrating if you don’t know how to organize it and how to read it.
If you want to have clarity about your construction business and end this frustration, then you must understand what’s on the PandL and what’s not.
And that where Rule #1 of the Profit First for Contractors Framework comes in.
Rule #1 is this:
Your income is 100% of your budget.
When you spend more than 100% of your income, then you are pulling cash from one of three places:
- You are spending profits you made during a previous time period.
- You are borrowing money from outside sources, or
- You are taking from internal sources (i.e. future projects or not paying yourself).
Operating a construction business that must borrow or take money from these cash sources creates cash flow problems for the business, stress for the owner, and keeps you trapped in The Craftsman Cycle®.
This is no way to operate a successful construction business.
That’s why you must abide by Rule #1 of Profit First for Contractors.
HOW TO INTERPRET AND IMPLEMENT A PROFIT AND LOSS STATEMENT FOR CONSTRUCTION BUSINESSES
Here’s how you should look at your Profit and Loss Statement for construction:
The Profit and Loss Statement (PandL) shows a business’ ability to produce a profit.
You receive some income, and this income is reported at the top of the PandL. This is referred to as “Top Line Revenue, Gross Revenue, or Total Revenue.”
Then you buy Cost of Goods Sold (COGS). COGS for a construction business is generally the money spent on labor, materials, subcontractors, and equipment.
You markup your COGS, and sell these COGS for a price. The price for all your projects during a given time period adds up to be your Total Revenue for that time period.
While you’re busy buying, marking up, and selling your COGS, you have to spend money operating your business. We call the money spent on operating the Business Expenses.
The money that remains after you receive some income (revenue), buy some COGS, and spend money operating your business is called Net Profit.
The Net Profit is the number at the bottom of the PandL.
Here’s the issue:
The number at the top of the PandL (Top Line Revenue) represents all the money your business has to spend on the COGS and Expenses, BUT the COGS and Expenses don’t represent all the money you spend on your business.
You also have to account for expenditures like Owner’s Draws and taxes.
But these transactions don’t show up on the PandL. They show up on the Balance Sheet.
That’s why the number at the bottom of the PandL never matches the amount in the bank account.
If you want to make sure you have the cash to operate your business and make a profit doing it, then you have to abide by Rule #1 of Profit First for Contractors.
THE SOLUTION FOR CASH FLOW PROBLEMS: YOU’RE INCOME IS 100% OF YOUR BUDGET
Profit First for Contractors solves the confusion and frustration associated with your financial reports by simplifying your finances.
For every dollar of income you receive, some percentage of that dollar will be “spent” on your profit, the taxes associated with making a profit, compensation for the most important employee (the owner), and operating the business.
The percentages of the accounts – profit, taxes, owner’s compensation, and operating expenses must always add up to be 100%.
If you spend more than 100% of the money you receive, then you will have problems.
That’s why Rule # 1 of the Profit First for Contractors Framework is:
Your income is 100% of your budget.
HERE’S HOW TO FINALLY TAKE CONTROL OF YOUR FINANCES
Do you wish you knew where all the money in your construction business was going? Do you get stressed out when it comes time to pay your taxes? Are you using a 20% markup because you’ve been convinced that’s all contractors are allowed to charge?
It’s time for you to take control of your construction business and implement the Profit First for Contractors system.
Enroll in the Profit First for Contractors Training Program, and I will walk you through your finances step by step by step. You’ll learn how to price your work to make a profit, you will be able to pay your taxes on time, and you’ll finally have the confidence to take your construction business to the next level.
You’ll finally understand the Profit and Loss Statement for construction businesses.
Break The Craftsman Cycle® of price work, get work, produce work, find work with the Profit First for Contractors Training Program.