THE #1 RULE YOU NEED TO HACK YOUR PROFIT & LOSS STATEMENT
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ARE YOU SPENDING MORE THAN YOU RECIEVE?
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 sources of cash 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) show 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?
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.
Rule number one of Profit First for Contractors is this: Your income is 100% of your budget. If you spend more than 100% of your budget, then you’re going to have problems. You’re going to have cashflow problems, you might go into debt in order to stay in a business, or you might have to start that next job to pay for the current job. And this is what keeps you trapped in the craftsmen cycle, that cycle that I describe in my book as price work, get work, produce work, find work, price work, get work, produce work, find work.
The reason that this is so frustrating and it’s such a hard cycle to break is because you don’t understand how to read your profit and loss statement for construction businesses. And the profit loss statement, well, it’s open to interpretation and it can be quite confusing. So let me explain basically how the profit and loss statement for construction is laid out and you can click a link down below and go read a blog post about where I describe how to use the profit and loss statement and understand it in the context of the Profit First for Contractors, rule number one.
All right, so the profit and loss statement for construction, four basic parts, income, costs of goods sold, expenses, and net profit. The income represents 100% of the money that comes into a business. Now we go spend some money on our cost of goods sold. This is the labor, materials, subcontractors and equipment. The things that we buy, we mark up and we sell to our customers. Then we’ve got our expenses. That’s category number three and this is everything else that it takes to operate our business. And so we take our income minus our cost of goods sold minus our expenses, and what’s remaining is net profit. And this is where the frustrating part comes in.
Because I know you’ve looked at that net profit, that number at the bottom of the profit and loss statement for construction. Then you go look at the bank account and you say, “Why don’t these numbers match?” They’re never going to match because the profit and loss statement, even though it shows 100% of the income that comes in, it doesn’t show 100% of the money that’s spent. You’ve got to go look at the balance sheet as well because there’s some money being spent over there and usually it’s in the form of owner’s draws or owner’s distributions and your tax liability. See, those monies go out of the business too, but they’re not represented on the profit and loss statement.
And this is why it’s so important to abide by Profit First for Contractors, rule number one: your income is 100% of your budget. So that number at the top of your profit and loss statement for construction, that is 100% of your budget at any given time. If you spend more than that, you’re going to have problems. Now, week to week, month to month, and maybe even quarter to quarter you might do that, it just depends on the cycle of your business. But overall, year to year, if you spend more than 100% of the money that comes into your business, you’re going to have problems.
So click the link down below and read the blog post where I go into more detail about how to use the Profit First for Contractors, rule number one. And when you get to the end of that, then I want you go enroll in the Profit First for Contractors Training Program. I’m going to walk you step by step by step through all of your financial reports. You’ll understand how to price your work in order to make a profit. You’ll know what to pay yourself, how you’re going to pay your taxes, and we’re going to design a rollout plan specifically for you and your construction business over the next year to two years. And trust me, this is going to make your construction business permanently profitable. So go read the blog post and then go enroll in the Profit First for Contractors Training Program. And I’ll see in the first lesson.
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Shawn Van Dyke is a construction industry consultant, business coach, and mentor to construction business owners. He is a Brand Ambassador for Fine Homebuilding, travels across the US as a keynote speaker, seminar presenter, and the author of two books – Profit First for Contractors and The Paperwork Punch List: 28 Days to Streamline Your Construction Business.
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