Financial Management: Accounting

Knowing what’s involved in managing your business can take you only so far if you lose sight of the bottom line. You’re in business to make a profit so you can stay in business, and managing your money is the key. Your profitability will depend on every aspect of your organization, including employee management and job management as well as all factors involved in general business management.

As a business owner/manager, you must constantly monitor the bottom line of your income statement to be sure that your expenses are not exceeding your income. This means that you have to be constantly informed of the current conditions of every financial aspect of your business. As a manager or owner you need to be able to keep all of the financial balls properly “juggled” in the air, at the right place and time. That doesn’t mean you have to do it alone. If this is not one of your strengths, then look for professionals and consultants to provide training and advice. Whether your business is large or small, new or well-established, they can provide guidance, give you options and develop plans to help you. Professionals will show you how to manage the finances while developing competitive advantages and provide proven management expertise.

A strong accounting system is essential for your business to survive and grow. Here are five key things you need to remember when analyzing your business financial documents:

1. Count your money

Understanding the financial picture of your organization is crucial. You have to count your money! You are not in business for practice, and the fastest way to go out of business is to lose track of your money and your cash flow. You need to know your costs on jobs and how much money you have. The place to start is to have well-prepared financial statements. There are basically four different types:

• A Balance Sheet
• An Income Statement (also called Profit & Loss statement)
• Statement of Retained Earnings
• Statement of Cash Flow

Your Financial Statement should be prepared by a qualified accountant using generally accepted accounting principles (GAAP) since these documents will be the records that you use to make all your business decisions. It is important for you to understand these documents, and you need to either read a basic accounting book to become familiar with the terms and the numbers that are the scorecard of your business or research each of these items online.

2. Make a Budget

Your financial budget is a projection of your future and desired goal, and a plan for its attainment expressed in dollars. At the beginning of your company’s fiscal (record keeping) year, you need to establish a budget based on your objectives. If you don’t know what your goals are, you will not be equipped to make the right decisions to get you there. If you don’t have the luxury of a full-time employee to prepare your financial statements, you need to work with a professional to help you prepare your annual budget and to teach you what you need to know so you can complete the monthly bookkeeping. If you create your own budget, become an expert in this area; do research on the internet, go to the library or get books so you can learn what it takes to have a successful business budget.

3. Maintain your books

It is critical that you stay up to date in reviewing your monthly statements (results of operations) and compare them with your budget (plan) to see how close you’re coming to your objectives (goal). Studying financial statements will enable you to understand the current financial health of your business and make necessary adjustments on a timely basis. The statement represents a financial record of what is happening to your business, and allows you to handle problems quickly, instead of waiting until they become unmanageable.

4. Understand your costs - Overhead

Overhead refers to the ongoing expenses of operating a business without considering the costs allocated or associated with specific jobs. Understanding these costs, especially when business is slow, is the most important factor in managing your finances. Estimating, which is an essential part of the contracting and service trades, is dependent on the accuracy of the overhead shown in your financial statement. If you don’t know how much you need to sell to cover your expenses, you won’t know how to estimate your jobs. Finding work is hard enough— the last thing you need is to lose money because you don’t understand what your true costs are.

Fixed costs. Some costs will remain relatively constant from one financial statement to the next—occupancy, taxes, licenses, bonding, fees, utilities, etc. Unless there is a radical change in the size of your business this cost will not vary much from one month to the next.

• If your business is struggling, moving to smaller facilities can make a big change in your overhead.
• If your business is very successful and has outgrown your current facility, expansion or moving to larger offices comes hand in hand with increased rent, equipment, office help, etc., and your total overhead will increase.
• If you add one or two more employees, you’ll probably occupy the same facilities and pay the same fees, such as licenses, utilities, etc. The total increase in overhead will vary only slightly and the cost of overhead per field employee will be reduced.
• Personnel costs are part of your overhead; usually administrative staff would be part of your overhead, and project personnel would be allocated to a job—your accountant should advise you how to handle these costs in your business.

Vehicles. If your company is primarily in the servicing business, the separation of truck overhead from other fixed overhead items might not be significant. In this type of business, for each employee there is a vehicle and the number of vehicles is increased or reduced with the change in the number of service personnel. In construction, there is not a constant relationship in the number of employees per truck; therefore, to create a more accurate financial picture, when you get to estimating, you would allocate your overhead in a more practical manner by maintaining fixed truck overhead as a separate item on your financial statement. Certain jobs may not require the use of trucks at locations where you put a trailer in place. Therefore, the cost of the trailer must be included in your job-cost estimate, but you may eliminate the overhead associated with the cost directly related to the trucks.

When you understand that your estimates have to include your overhead burdens and profit (the cost exposure to the risk of doing business) as well as the cost of direct labor, required materials and other costs relating to the job, you start to understand the importance of your monthly financial statements. It is also important to keep track of discounts and deals made with customers. Working with friends and families “require” some sort of discount, so keep track of what percentage of profit was lost. When you are adding up your monthly or quarterly Profit/Loss Statement, you may be unpleasantly surprised what your profits could or should have been.

5. Owner’s Expense/Owner’s Bonus

It is just as important to have a personal/family budget and financial statement as it is to have one for your business. The item on the statement headed “Owner’s Bonus” or “Owner’s Expenses” is a catchall for owner’s expenses paid by the business. As an owner, you take the financial risk, so you are entitled to a greater share of the profits. However, when you are struggling to make decisions about your business expenses this would be an area where you have more flexibility.

Understanding what you need financially on a personal level is critical—if you are failing financially in your personal life, there is no hope for your business. Talk to your CPA or tax attorney to make sure that you are taking advantage of legally permissible business deductions here and elsewhere to reduce your tax burden. No matter what stage your business is at, now is the time to study your financial statements.

Examine all of your expenses and outflow. By knowing where each penny of your money is going you will be able to identify every item that can be reduced, eliminated or even increased so you can make healthy decisions for your business. Once you have a clear picture of where you are in relation to your goals, you can make your plan and take control—focus on one project at a time.

The above content is extracted from Mike Holt's Business Management Skills program.

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Mike Holt is an author, businessman, educator, speaker, publisher and National Electrical Code? expert. He has written hundreds of electrical training books and articles, founded three successful businesses, and has taught thousands of electrical code seminars across the US and internationally. His company, Mike Holt Enterprises, has been serving the electrical industry for over 40 years, creating and publishing books, DVDs, online training and curriculum support for electrical trainers, students, organizations, and electrical professionals. 

Mike has devoted his career to studying and understanding the National Electrical Code and finding the easiest, most direct way to share that knowledge with others. He has taught over 1,000 classes on over 40 different electrical-related subjects to tens of thousands of students. His knowledge of the subject matter, coupled with his dynamic and animated teaching style, has made him sought after from companies like Generac, IAEI, IBEW, ICBO, NECA, and Fortune 500 companies such as IBM, Boeing, Motorola, and AT&T. He is a contributing Editor for Electrical Construction and Maintenance Magazine (EC&M) and formerly Construction Editor to Electrical Design and Installation Magazine (EDI). His articles have been seen in CEE News, Electrical Contractor (EC) International Association of Electrical Inspectors (IAEI News), The Electrical Distributor (TED) and Power Quality Magazine (PQ).