Presentation on theme: "Restoration Industry Marketing & Business Development Summit 2010."— Presentation transcript:
Restoration Industry Marketing & Business Development Summit 2010
Presentation Agenda 1 of 2 How Accounting Can Provide More Value To Your Restoration Business The Back Asswards Formula Your Profit & Loss Statement Remember – You Can’t Have Alligator Jaws And A Hummingbird Rear End
Presentation Agenda 2 of 2 Financial Benchmarks: Good Question The “Sweet Spot” of Financial Benchmarks Basic Rules Common Errors Analyzing Ratios Caution Cash is King Financial Benchmarks in Restoration
How Accounting Can Provide More Value To Your Restoration Business Four Key Functions in your office 1.Accounting 2.Estimating/Sales 3.Production 4.Administration/Sales
How Accounting Can Provide More Value To Your Restoration Business Is your Accounting Department helping you run your restoration business like a well oiled machine?
Accounting Accounting should be a core function It’s a main gear in your business Your accounting department has two basic rules –1. Processing transactions –2. Reporting information
The Back Asswards Formula Know Your Big Picture Goals 9 out of 10 have no clue what their big picture goals are What will your revenues be? Your profits? What will your typical day look like? What will make you the best of the best? How will you personally benefit by building your business (monetary & non-monetary)?
The Back Asswards Formula Reverse Engineer your big picture goals What are your annual revenue and profit plans? –Today? –1, 2, 3, 4 and 5 Years from now? If you don’t go through this process the numbers are just being made up with no tangibility to them. This puts dollars in your plan / Helps you see exactly will need to happen if your big picture goals have any chance of becoming reality.
Your Profit & Loss Statement The more you know about your business the better position you are in to make wise decisions Financial information can be extremely,,but it’s critical! Majority of P&L’s are not set up properly Often have overhead items under job costs and job costs under overhead
Your Profit & Loss Statement There are 4 primary methods of accounting in a construction related company –Cash Basis –Accrual Basis –Completed Contract Method –Percentage of Completion Method
Your Profit & Loss Statement Cash Basis –Most basic method –Can be most inaccurate –When a deposit is made, it’s income –When a bill is paid, it’s an expense
Your Profit & Loss Statement Accrual Basis –Includes all revenues invoiced and all costs incurred on all jobs to date, even if invoices or bills have not been paid –Income received would be matched with expenses against that income even if bills haven’t been received or paid yet –Better than Cash Basis but not best of us
Your Profit & Loss Statement Completed-Contract Method: –Used mainly by spec homebuilders –All income is recognized when a job is 100% complete –Not a method any of us restoration contractors should be using
Your Profit & Loss Statement Percentage of Completion Method: –Or WIP based accounting –Best method for restoration contractors –Recognizes revenue only on the portion of the job that is complete –Tracks earned and unearned portions of a job separately –Earned portion is tracked as income –Unearned portion is tracked in an asset or liability account until it is earned –With this method the profit margin on jobs is accurate
Remember – You Can’t Have Alligator Jaws And A Hummingbird Rear End Key factors to keep you out of trouble Keep fixed costs low Growth always requires more cash Know where you are going to find cash before you run out of working capital Educate yourself
Financial Benchmarks: Good Question: Tough Answer So many things affect our business So much info out there, where to start? We are pulled in so many different directions You (owners) are not generally held accountable We have to get back to the basics
Financial Benchmarks: Good Question: Tough Answer Put things and systems in place #1 way to make information into transformation is Implementation Mindset is extremely important (make a decision, commit & believe you can….) We are wired to follow – so make sure you follow the right things (born unique die copies)
The “Sweet Spot” of Financial Benchmarks When and how can you hit that sweet spot, financially, in your business? Delegate / Outsource / Systemize –Frank Sinatra didn’t move his own piano. Leverage your time & resources You are not in business to have a hobby
The “Sweet Spot” of Financial Benchmarks Financial info can be extremely interesting …… and its critical! Set your companies objectives for: –People / Customers / Operational / Financial What are your financial objectives? –Need to know so you can keep score What are your “Numbers that matter”?
Basic Rules What should be included in COGS? Job Costs – all expenses that can be traced to only one (1) job What is included in Expenses? Overhead – all expenses that can be traced to two (2) or more jobs What is Gross Profit? –Revenue minus COGS (tells basic profitability)
Basic Rules Balance Sheet –Reflects the assets, liabilities and Owner’s Equity at a point in time Shows at a specific day what it owned, owed and how much its worth Always balanced – Assets much equal Liabilities and Owners Equity
Common Errors Owner Working on a job –Owner’s labour is a job cost (COGS) –Owner’s salary is an overhead cost (Expense) Job Supervision –Running multiple jobs = Overhead costs –Running 1 job at a time = direct job cost
Common Errors Normally NOT in your P & L –Depreciation Represents the money needed to replace tools, equipment, vehicles, office furniture, etc. that is wearing out or has already died. –Owner’s salary is an overhead cost (Expense) Leaving depreciation in your P & L can be confusing –Discuss with your CPA
Common Errors Miscellaneous Category –This category often misused i.e. items over $100 (or whatever minimum your CPA suggests). Properly categorize whenever possible. –It doesn’t take any longer to put in an expense where is belongs than it does to put in Misc. or Other category. All too often this line is too big
Common Errors Contributions & Donations –Be careful ….. there may be limitations. (Get advise from your CPA) Meals & Entertainment –Should only be there if you are profitable –Make sure you have all receipts, who was involved, business purpose and/or income this expense generated
Common Errors Suspense Account –Short term catch all for CPA to clean up –This line is a red flag to your bankers –Means owner or book keeper don’t know where things go and just plug these expenses in anywhere –If they are doing that to your P & L what else are they doing that will come back to cause problems and wipe out profits.
Common Errors Length of P & L –1 to 2 ½ pages maximum –If longer than time to reassign some items and consolidate Not having “Percent of Sales” showing –Easier to read and remember a percentage –Compare one month to another easily by %
Analyzing Ratios RATIO’S –Indicates the relationship of one number to another –We use ratios everyday Baseball batting average.333 is a ratio Lottery – 1 in 77M odds of winning is a ratio –Ratio’s do not require complex calculations –Usually calculated by dividing one number by another and then express the result as a decimal or as a percentage
Analyzing Ratios Different people look at different ratios. –Bankers & Lenders Debt-to-Equity (gives idea on whether your company will be able to pay back a loan) Ask your banker what ratio’s they look at and what is good and bad range. Owners and top managers –Gross Margin –Net Profit / Average Days Outstanding / etc.
Analyzing Ratios Credit Managers (Leasing) –Quick Ratio (indicates a clients supply of ready cash compared to its current liabilities) Whether to give credit and how much Shareholders (and would be acquirers) –P/E Price to Earnings for public –EBITDA for private – helps decide if a company is valued high or low in comparison with similar companies
Analyzing Ratios The power of Ratios lies in the fact that the numbers in the F/S by themselves don’t reveal the whole story Numbers by themselves do not take into consideration things such as: –Size of company, what numbers were in comparison to last year, actual vs. budget, etc Great tool to answer “compared to what”
Analyzing Ratios Ratios offer points of comparison –Tell you more than raw numbers alone –Profit can be compared to sales / or with total assets / or with amount SH have invested –Helps you understand if numbers you are looking at are favorable or unfavorable. –Ratios themselves can be compared Compare with themselves over time (can reveal powerful trend lines & warning signs Compare with projections Compare with industry average
Analyzing Ratios Profitability The higher the better (mostly) There are dozens of them (pick 5) Remember….. Profitability is a measurement of a company’s ability to generate sales and to control its expenses None of the numbers are wholly objective
Caution Every owner should understand the “numbers” side of your business Be aware that numbers can’t tell the whole story ….. But somewhere in the numbers is the real story!
Caution You hate math! –Join the club –Surprise! Basic finance involves + and – –Fancy finance involves X and ÷ –If you can determine the area of a curved wall………..
Caution Is Profit your “real” objective? –Perhaps it is: Satisfying customers Support your community Pay for your fishing expeditions, etc., –But… if you don’t make a profit you won’t have a business –Profit gives you the resources for your real objectives –Profit helps finance growth
Caution Are you afraid of appearing ignorant? –Saying you understand everything said by: Accountant Banker Financial advisors, etc. –Don’t be afraid of: Reading articles & books on finance Take financial courses Ask questions (yes, real men do this sometimes)
Caution You don’t have time? –What could be more fun than reading a Balance sheet on the beach!
Caution Numbers should inform your decisions, not determine what you decide Profit is an estimate A profitable company can be run just about any way you want When Unprofitable – other people poke their nose into your business (lenders, investors, suppliers and even customers)
Cash Is King CASH is the 3 rd element of the Financial Statements Income Statements & Balance Sheets, however useful, have all sorts of potential biases, a result of all the assumptions and estimates that are built into them CASH is different…….
Cash Is King Look at a company’s Cash Flow statement and you are indirectly looking at its bank account Cash Flow Statement is a prominent measure by which analysts evaluate public companies….. Why don’t we? It’s the number least affected by the “art of finance”
Cash Is King Profit does NOT equal Cash coming in –Why? Revenue is booked at sale. No cash has exchanged hands A/R reflects customers promise to pay Cash Flow, by contrast, always reflects cash transactions
Cash Is King Profit does NOT equal Cash coming in –Why? Expenses are matched to revenue Info on a P&L associated with generating revenue during a given time period Many expenses not actually paid during that time Expenses on P&L don’t reflect cash going out Cash Flow Statements always measure cash in and out during a time frame
Cash Is King Profit does NOT equal Cash coming in –Why? Capital Expenditures (CE) A CE doesn’t appear on the P&L when it occurs; only the depreciation is charged against revenues Items like vehicles, equipment, computers, etc. will appear on the P&L only gradually, over the useful life of each item All of these items are often paid for long before they have been fully depreciated and the cash used to pay for them will be reflected in the cash flow statement
Cash Is King Profit without CASH –How can this happen... If you are growing? Sales increase every month Your COGS increases Your operating expenses increase (+ people) Vendors need to be paid (30 days) A/R average (+60 days)… if billed on time! Means you have to “front” the cash for at least 30 days As long as sales are increasing it is hard to catch up on cash unless you find additional sources of cash.
Cash Is King Cash without Profit Can this happen? Is it dangerous? –Yes, Cash based businesses can get caught here –Cash may grow for a while, but …… –If you fail to attain profitability, eventually you will run out of cash.
Financial Benchmarks In Restoration Company’s So, what are the Financial Benchmarks for your restoration company? –Good Question – Tough to Answer Key to success is to focus on the basics: –Drive Sales to increase revenue –Decrease costs –Do both Your focus will change as your business develops
Financial Benchmarks In Restoration Company’s Before getting into specifics - a few quotes: Money is better than poverty, if only for financial reasons. (Woody Allen: actor & director ( ) A bank is a place that will lend you money if you can prove that you don't need it. (Bob Hope: actor & comedian ( ) Never spend your money before you have it. (Thomas Jefferson: 3rd president of US ( ) Money is good for bribing yourself through the inconveniences of life. (Gottfried Reinhardt: director & producer (1913 – 1994)
Benchmark – the desired result, the goal, the key issue Owner Comfort: Measurements: –Pay –ROI –Benefits –Hours worked –Leisure –Spending at least 50%+ of time working on what they enjoy most –Personally happy doing what you do
Benchmark – the desired result, the goal, the key issue Financial Management: Measurements: –Produces and follows an Annual Budget –Achieves Net Profit of 8%> consistently –P&L’s generated monthly (WIP based) –Job Cost gross margins are obtained –Job Cost reports timely produced –Job costs accurate to +/- 2% of estimate –Overhead runs in 20 to 30% range –Current Ratio averages 1.3 to 2.0 to 1
Benchmark – the desired result, the goal, the key issue Key Ratio’s: Some examples included in hand out material. I encourage you to review with your accountant and start tracking and looking at trends.
Financial Benchmarks In Restoration Company’s In Closing…… remember: If your outgo exceeds your income Then your upkeep will be your downfall
Restoration Industry Marketing & Business Development Summit 2010 Thank You! Dan Murray, CR Thank You! Dan Murray, CR