Historically, being a contractor is a great vocation and a productive way to make a great deal of money. Although 2008 and 2009 were not great years for contractors, predictions are that 2010 and 2011 are going to be much stronger than the last 24 months. How do you capitalize on that opportunity?
I am a believer in copying things that work and after 30 years of working with business owners, those that have the most money, least amount of debt and stress are the contractors that focus their attention on the bottom line. Yes, making profit, month after month, quarter after quarter and year after year. They use every method they can to insure that the actions they take every day will make them money.
Want to your spouse to see big pay checks – focus on profit. Want your kids to have a good education – focus on profit. Want to retire early and wealthy – focus on profit. Want your banker to loan you money when you need it – focus on profit. Want to have cash liquidity when you need it – focus on profit.
One of the tools used by successful contractors as a way to manage the performance of their business is their monthly financial statements. They not only tell if the company was profitable for that month; but also if the company wasn’t profitable, why it wasn’t profitable. Was revenue lower than expected, margins off or expenses high? Information is powerful and with current and accurate information, the contractor can be successful.
Where the contractor gets into trouble is when he shoots from the hip and makes a decision without good data. The contractor wouldn’t be caught dead on a job site without a tape measure. Financial statements are the business’s tape measure. When the profit and loss statement shows profitability, money will be flowing freely. When the company doesn’t show a profit, management will always be struggling with having enough cash to operate their business.
Here are six benchmarking tools you can use to determine if your company is on the right path from a financial performance measurement standpoint. This information was cleaned from a hundreds of other contracting companies as of January 2010.
- Gross profit margins 45% of 50% of revenue
- Net profit 5% to 9% of revenue
- Outstanding accounts receivable – 22 days to 35 days
- Outstanding accounts payable – 29 to 35 days
- Debt to equity ratio 1.6 to 2.9 to 1
- Sales per full time employee $81,000 to $112,000 per year
The financial management function for most contractors consists of looking at the outstanding unpaid bills, outstanding invoices and seeing how much money is in the check book. Most contractors stagnate at revenue levels over $1 million because the check book method of financial management doesn’t work.
The bottom line. When you invest a little time and money into a good financial accounting system with job costing and get some one with experience to enter the data and print reports, you will be ahead of 70% of your competitors. They don’t know when they are loosing money. Only the strong survive in any business. Will it be you or your competitor? You get to decide.
Questions? Get with me. Want to add to this list? What are your thoughts?
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Great information! I’ve been looking for something like this for a while now. Thanks!
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