Making Money and Going Out Of Business at the Same Time
Can you make money, yet lose your business? Sounds like an oxymoron, doesn’t it? Well, I am here to tell you that it is possible, as I have almost done it myself a time or two.
Contractors go out of business by operating their companies without understanding their Profit and Loss (P&L) statements. In the process, they run out of cash. George Hedley, who is one of my business coaches says he is convinced that 90 percent of construction business owners doing under $10 million per year, do not know how to correctly read or understand their P&L statements. That was certainly true for me during my first 10 years of business, and when my company was doing under $10 million in sales.
A contractor who was struggling financially asked if he could meet me to get advice on how to survive in his contracting business. I asked him to fill me in on the troubles he was facing, so I could prepare for the meeting. He told me he could not figure out why he has no cash, even though he is making money.
Knowing the contractor and his spending habits, I asked him to bring me his P&L statements from the last three years, so I could analyze them at the meeting.
“I don’t know if I have them. Where would I find them?” he asked.
“Ask your accountant to provide them to you. He should have these statements,” I explained.
So, he went to his accountant to get the statements. In doing so, his accountant explained the measly profit he had earned over the last three years. When he came to my office, he laid the statements on my desk and said, “I already figured it out. I thought I was making a lot of money, but found I only made $12,000 last year. I spent way more than that on purchases. I am making money and running out of cash at the same time.” My friend had discovered his own issues by having his accountant explain to him how much he was earning versus his expenditures.
This can happen to any contractor who doesn’t watch his spending and debt load compared to company profits. Let’s say you earn $100,000 this year, and your equipment and other payments total $14,000 per month – or $168,000 by the year’s end. After you pay about $30,000 in taxes, your net cash income is $70,000. With $168,000 going out, you just had a year when you made money, but lost $98,000 in cash. It doesn’t take many years like this to totally drain the cash out of your organization.
What I have learned over the years is this: Regardless of how big or small your company is, to avoid making money and going out of business at the same time, you must have a monthly P&L conducted and understand how to analyze it properly.
If you don’t have someone who can do the P&L inside your operation, hire an outside accountant to do one for you. Study the P&L and ask questions as to why you made or lost money. You will quickly understand how to read the statements yourself. After all, you are paying your accountant to make sense of those statements for you. By understanding your monthly P&L statements, you can adjust your buying/spending habits to ensure you maintain a strong balance sheet.
At Watertown Enterprises, we take the P&L statements to another level. Not only do we present them to the owners of each company, we present them monthly to all office personnel, as well as the project managers, superintendents, and foremen in the field. We want them to understand these statements and what it takes for a company to survive as if it were their own business. We then pay their bonuses (or incentive, as I like to refer to it) based on the monthly P&L results.
The incentive they receive is based on three aspects of the monthly P&L statement. The three aspects are total sales collected, gross profit and net profit. It is amazing how much a company can benefit from letting everyone working in a management position know how important these three aspects are to the success of the company. Not to mention, when part of their income depends on it, the P&L becomes just as important to them as it is to us.
When you are watching a ball game, the officials put up a scoreboard to show you who is winning as the game is being played. In business, your accountant must keep the score in front of you, so you know if you are winning or losing as the game is being played.
Have your scorecard prepared every month, instead of waiting until the end of the year. This will require an investment on your part for the accounting expenses but will be money well spent. You need the monthly progress reports so you know if you should purchase equipment, hire more help, or call audibles while playing the game. You can’t do that if you don’t know the score until the end of the year, or when the game is over. The last thing you need to do is to make money and go out of business at the same time.
Damian Lang is CEO at Lang Masonry Contractors, Wolf Creek Construction, Malta Dynamics, and EZG Manufacturing. To view the products and equipment his companies created to make jobsites more efficient, visit his websites at ezgmfg.com or maltadynamics.com. To receive his free e-newsletters or to speak with Damian on his management systems or products, email:firstname.lastname@example.org or call 740-749-3512.