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No. 3: What’s Up Doc?
UNDERSTAND AND USE MANAGEMENT-LEVEL REPORTS
Editor’s Note: Following is part three of our eight part series called “Better Next Year,”
by Fred Ode, CEO, chairman and founder of Foundation Software.
You are sitting in a medical
examination room waiting
for test results of a “mysterious”
pain that won’t
go away. The doctor walks
in, takes one look at the report and
exclaims, “I’m no good at reading lab
reports.” Feel better?
So how do you feel about a construction
business owner who says, “I’m no good with numbers”? It’s
equally unacceptable. Sure, accounting
may not be a favorite (or strong)
subject among contractors, but a company’s
long-term survival is dependent
on the owner’s understanding of
the numbers.
In order to monitor and manage
a company’s overall health, owners
need to perform and understand
financial reporting on two levels:
executive-level reports (which provide
a quick, project-by-project overview)
and project-level reports (which fill in
all the details). This article will focus
on the executive-level reports (typically
one-line-per-job reports). (Next
month’s article will cover the importance
of project-level job reports).
Luckily, technology today offers
better tools for managing data and
automating all the management-level
reporting that contractors need. In
addition to preparing basic financial
statements (such as the income statement
and balance sheet), a contractor’s
accounting software package
should be capable of producing the
following key reports for contractors
to review on a regular basis:
Gross Profit by Job: The gross profit report by job shows contractors, at a glance, how
their jobs are doing in terms of gross profit. When used
and reviewed regularly, this report reveals the profitability
(or loss of profits) for each job by listing total contract
sales to date less direct job costs. Essential as it is,
however, contractors need to make sure it’s not the only
report they use to measure success. Because the gross
profit report shows only direct job costs and not indirect
or overhead expenses, it can distort the view of the big
picture.
Job Overhead Allocation: This report is essential
because it allows owners to analyze overhead as a percentage
of certain job costs and/or revenue and see net
profit for each job. Owners will gain a better perspective
of a job’s true bottom line with this report.
With the right accounting software and a method
that makes sense for the business, overhead allocation is
much simpler to perform than many think. For example,
a labor-intensive contractor may choose to allocate overhead
based on labor costs, an excavating contractor might
choose to allocate overhead based on equipment costs or
a combination of equipment and labor costs, and so on.
A CPA with a focus on construction should be able to tell
contractors which method is best for their business. Once
the formula is in place, good construction accounting
software ensures that overhead allocation happens automatically.
Over/Under Billing by Job: This report, (also known
as work in progress and percent/complete), is often
required by banks and sureties to determine a contractor’s
current financial position. Because it shows where
each job stands to date in terms of billings, it is also
essential as a management-level tool. With just a glance,
owners can identify jobs that are under-billed (leading
to possible cash flow problems), as well as jobs that are
over-billed (resulting in inflated company profits if not
accounted for). Most importantly, when reviewed regularly,
this report helps owners identify problem jobs in
time to make adjustments.
Again, a contractor’s integrated job costing system
should produce the over/under billing by job report on a
timely basis and should automatically adjust the company’s
income statement so that profits are never over- or
under-inflated.
Cash Flow by Job: In construction,
monitoring cash flow is essential
because cash pumps in and out of
the business through many separate
projects. The cash flow by job report
provides an overview of the net positive
or negative cash flows relating to
each job, allowing owners to identify
and take immediate action on jobs
that are having cash flow problems.
When contractors use a construction
accounting system that attaches
every transaction (i.e., accounts
payable, payroll and accounts receivable)
to a specific job, this report—
and the monitoring of cash flow by job—becomes automatic.
Just as doctors are able to monitor
your health by reviewing a series of
X-rays, construction owners need
to regularly review these four key
reports to determine their company’s
financial wellness. When viewed
over time, these “one-line-per-job”
summary reports reveal both job
trends and inconsistencies. This
kind of data prompts further investigation
that can be answered in
more detailed project-level reports.
Ultimately, executive-level reporting
leads to tighter control, better decision
making and higher profits.
Want to ensure that your company’s
health is better next year? Then
take the time to use and understand
the executive-level reports that
define how your company is performing.
Fred Ode is the CEO/chairman of
Foundation Software, developer of construction
job cost accounting software
called FOUNDATION for Windows. For
further information on FOUNDATION
for Windows, visit www.foundationsoft.com. Fred Ode can be reached directly
by phone at 800.246.0800 or e-mail
fred@foundationsoft.com.
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