The ABCs of P&LsJun 26, 2022
When I think of the many hard-working restoration business owners I’ve met over the years, putting in long hours and striving to succeed in our challenging industry, I sigh. I’ve been there!
And when I think of the many owners who will do just about anything – anything at all! – to avoid looking at their financials, I get excited.
You might think it’s strange, but think again: all of those dry columns and rows of numbers are the health indicators of your business. You’d want to know if your blood pressure was too high, wouldn’t you? Or if that mole or dizzy spell was the first sign of something life-changing?
I get excited because getting a handle on regular financial reviews will be life-changing for you and your business, but in a very good way. I guarantee it.
Now honestly, I understand your trepidation. When you visit the doctor, you may be surprised by what you find out. But if you’re planning for the long term – or at the very least, for a good night’s sleep – it’s better to know how your business is doing.
Making a habit of regularly scheduled business performance reviews will pay off in so many ways.
- You’ll no longer be flying blind; you’ll know precisely where your business stands now, and get a clearer picture of where it may be headed.
- Patterns will begin to emerge, allowing you to address them proactively, making modest tweaks and major improvements.
- A firm grasp of the numbers will bolster your self-confidence as a business owner.
- Your profitability is likely to increase.
- You’ll be able to offer greater compensation and benefits – which is critical, considering current hiring challenges.
- The value of your company will increase because the selling price of any business is tied to its historical and projected cash flow, otherwise known as Seller’s Discretionary Earnings (SDE).
- You won’t have the nagging feeling that you’re ignoring something which is crucial to your survival…and success.
The Profit & Loss Review
For many, P&Ls – also known as income statements – are cause for anxiety. It’s understandable. Seeing all of your team’s long hours and hard work reduced to a set of numbers can be disorienting, at first. But relax! You’re about to take a big step toward basic financial literacy.
P&Ls are the central document your business will need, for tax purposes and for monitoring the health of your business. They’re also important if you’re planning to open a line of credit at the bank or meet with any potential investors, partners, or suppliers. Someday, when it’s time to sell your business, these reports will be the primary focus of the buyer’s due diligence. A P&L demonstrates your company’s financial viability as of this fiscal period (month, quarter, or year), and over time.
A P&L statement has five main components:
- Revenue (Sales)
- Cost of Goods Sold (COGS: labor and material for production)
- Gross Profit (Revenue minus COGS)
- Expenses (Overhead such as rent, utilities, office wages, insurance, etc.)
- Net Profit (Gross profit minus expenses)
The P&L should be analyzed in two ways: cash basis and accrual basis. The cash basis reports on when you spend and receive funds. The accrual basis reports on when you incur costs and expenses and produce revenue.
Income shows on the accrual basis report when the work is completed and invoiced, whereas income only appears on the cash basis report when payment is received. So, when your cell phone bill arrives in July, this expense will be on your July accrual P&L. When it’s paid in August, it will appear as an expense on your August cash P&L.
Just remember: When expenses occur and invoices arrive or are generated, that’s accrual. And when checks are cut or deposited, that’s cash.
I recommend scheduling time each month to review both the accrual and cash P&Ls, so you recognize what has gone well in your business and find opportunities for improvement. And once you begin to monitor your gross profit (revenue minus COGS) for the different areas of your business – water, fire, mold, reconstruction, etc. – you are likely to continue to find improvement opportunities.
The Collaborative Approach
When it comes to job costing, your team should be fully engaged. You should be able to analyze a P&L specific to each of your mitigation and reconstruction jobs. Develop a routine of regular review so you know exactly where you are with each of your jobs, at every stage. With this strategy in place, the opportunity to improve your process and profitability is immense.
And here’s the most important part: Always have at least one team member on any job who is ultimately responsible for the budget of that particular project. Hold regular financial review meetings with them. Weekly is a great place to start. This ensures that, while quality work is always a goal for any job, so is working within the budget constraints.
Performance-based compensation is the ideal way to reward your team members for achieving the financial goals of your company. Three of the most common metrics are related to revenue produced, gross profitability, and collection time.
It’s All About the Cash Flow
How do you run your collections procedure? Do you have a system in place that spells out the sequence of events from the time the job comes in until the last dollar is collected? Or is it all hands on-deck making collection calls when the bank account gets dangerously low?
Critical elements in the process are related to prompt invoicing of completed work, regular follow-up with the related parties (client, carrier, TPA, mortgage company, etc.), monitoring cash flow throughout the life of the job, creation and adherence to a draw schedule, trigger points to pause work if there is a payment problem, and when to escalate a problem account to a collection service or the legal system.
As you work through all of these details – P&L review, jobs costing, close team collaboration, and cash flow – you’ll begin to see opportunities to improve your processes and put new systems in place.
One of the best ways to know what’s possible in terms of financial metrics is to work with an industry consultant and to reach out to your friends in the industry. Compare notes and brainstorm strategies together to improve your process…and your profitability.
Now what? Where do you go from here? My go-to approach for making progress in any area of my personal or professional life is to set goals. Think about how you can implement some or all of what I’ve shared and start with two or three goals that will get you some quick wins. Once you get comfortable with your P&Ls, you will never be at a loss; you’ll always profit from them.
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