Financial Reporting Structure for a Contracting Business. Part 3
Imagine giving a technician a significant raise and being 100% certain you will be able to afford it and that they are still highly profitable. Well, you can.
This is part three of three in my series of posts talking about the importance of financial structure. If you haven’t seen my last post, please go back and read it. I post it on the home page so it is easy to find.
Putting this Information to Work
Extensive financial and business information is used to create highly detailed reports, performance dashboards, and key performance indicators. Now you are ready to make better more informed business decisions.
Departmentalized Income Statements
You will have the ability to produce income statements by the department, right down to net profit. You will be one of a very small group of contractors that have divided their financials into important segments and knows exactly how much net profit (or loss) is generated from each one.
The Power of Breakeven
(Income – Cost of Goods Sold) = Gross Profit
(Gross Profit – Variable Overhead) = Contribution Margin
(Contribution Margin – Fixed Overhead) = Net Profit Before Taxes
When contribution margin dollars cover your fixed overhead, you are at your breakeven point. Every single contribution margin dollar becomes net profit.
Imagine the power of knowing the exact day of each month where your company breaks even. Based on the facts, you can offer discounts to fill unused capacity or turn down low-profit work in favor of something more beneficial. You can offer performance bonuses with confidence.
A detailed set of dashboards offer a deep look into every finite detail of your business. There will be complete transparency regarding technician production, department profitability, sales lead production by an employee, marketing success, customer experience, health and safety, HR, and so much more.
Specialized Accounting Software
If you want the things mentioned in this article, but do not know where to begin, invest in great software and use it properly.
Do not let your employees or outside accountant tell you what software to use. If your accountant suggests generic store-bought software, get a better accountant. They are more concerned with themselves than they are your business.
You need specialized contracting business management software that puts a strong emphasis on accounting and financial structure. Do not be fooled by bells and whistles or the promise of “this software is super easy to use”. The only way to make software easy to use is to cut out important features and remove options.
You likely invest significantly in training for your technicians. The same should be true for people that use your financial software. If you have great software, it is vital to use that software to its fullest extent and the way the designer intended it to be used.