Hit A Home Run With A Better Accounting Strategy
I am a baseball stats junkie. As a kid, I couldn’t wait for the Sunday paper to arrive because, at the time, it was the only way to get the MLB team and individual statistics update. I laugh about that now, of course – now that stats are available in real-time. But just imagine having to wait a week to get detailed and accurate information about the team is doing. It’s crazy to even think about!
That got me thinking about the other areas of our lives that have been impacted by technology and 24/7 accessibility to vital information. We are using so much tech and have so much information at our fingertips every day but, for many, when it comes to running a business, management is still waiting around for their team’s stats.
How Long Are You Waiting For Your Stats?
I continue to talk to a number of construction company leaders who fall into this camp. Oftentimes, they are waiting a week (or even a month!) to have even a vague notion of their financial performance. Now, they may have a labor and materials report or project meetings to provide them with a snapshot of their performance to tie them over (not unlike the simple, daily box scores that were provided back in the day), but as for detailed, accurate financial information – they must wait.
Failure to have access to timely financial information can hinder your ability to make well informed, strategic management decisions, such as what jobs to go after, where the best profits are generated, etc. In fact, some of the issues I encounter when talking to those in the industry reinforce this statement.
Management decisions are hindered when leaders:
- Don’t match bid estimates to true accounting charges for every job on their Profit & Loss statements.
- Charge invoices, payroll and job costs to the wrong job or wrong accounts.
- Fail to match estimates to project budgets or their accounting system.
- Use labor rates in bid estimates that are not the actual costs required to cover taxes, health insurance, liability and workers’ compensation insurance, PTO, bonus pay, pension and profit-sharing contributions and downtime/shop-time when there’s no work.
- Don’t include extra time in their labor-hour estimates to cover overtime, weather delays, call-backs, punch-list work or other extras.
- Forget to include costs for company-owned trucks and equipment in bid estimates and, subsequently, fail to charge for any equipment; which results in making overhead absorb the cost
- Don’t take into account costs for small tools, cellphones, tablets, trucks, fuel, mobilization, safety equipment and training time in their bid estimate.
- Bid general conditions, project management and supervision as a percentage add-on to estimates and bids versus calculating the estimated actual cost per job.
- Charge too little for change orders, costs and labor and equipment rates.
- Charge the same overhead and profit markup on every job.
- Don’t use markup percentages that cover annual overhead expenses in full.
- Don’t know their annual profit goal’s necessary percentage markup.
Your bids should match the way you job-cost and should be consistent with the way your income statement and jobs report are laid out and presented. Ultimately, it’s your responsibility, as the owner, to provide complete and accurate cost measurements that, if achieved, would generate profit at the desired percentage.
Start Keeping Score
Of course, not every construction company has the resources or capability to implement these “scorekeeping” best practices on their own. However, these days, it’s easy enough to enlist temporary outside assistance to help put these accounting policies in place.
Trust me when I tell you that, when it comes to seeking additional surety or financing capacity or when you seek to value or transfer your business, the cost of forgoing these practices is enormous. In fact, I would go as far as to say that your ability to have a “real-time scorecard” is one of the best investments that you can make in your business.
If your advisors aren’t encouraging and discussing these best practices with you, give me a call to discuss.
By Doug Houser, CPA, MBA, CEPA (Dublin office)