Guest Blogger: Melanie Hodgdon is a Certified QuickBooks ProAdvisor who has been providing financial analysis and QuickBooks training for contractors since 1994. She’s the co-author of A Simple Guide to Turning a Profit as a Contractor. Melanie and Shawn often coordinate their efforts when helping remodelers develop financial systems for their businesses so they serve the contractor, not just their accountant.
You Can Build A House, But Can You Build Financial Reports Too?
For many contractors, there’s a frustrating gap between what goes into their financial software and what comes out in the form of useful reports. After twenty years of helping contractors obtain and interpret useful reports, I find that the vast majority of my income comes from cleaning up, restructuring, and sometimes discarding and re-starting accounting files that simply aren’t doing their job.
What’s important to know?
The only reason to use financial software is to provide answers to questions. Who’s asking the questions? How about
your production manager?- your estimator?
- your sales team?
- your marketing department?
- your tax accountant?
- your CFO/partners/investors
- the bank you’re approaching for a credit line?
- the prospective buyer of your company
If you haven’t thought about these questions before you start, you may be doomed to relying on luck to get your answers.
Starting right
Nobody starts out by saying, “Hey, I’m going to buy software, invest a whole lot of time into entering information, and then hope that I get good results.” Yet, with the best of intentions, most contractors don’t get it right the first time. There are three basic elements that need to be in place before the results will justify the investment of time, energy, and dollars:
If you’re setting out to just “drive around” you don’t need a destination. But if you need to get somewhere, it’s important to know where the destination is relative to where you are. So if I want to drive from New York to California, I should be heading west, not south. It’s the same with your financials. If you don’t have a clear view of the destination (answers to your questions), getting there is left to chance. You must identify what you want to find out.
If you’re planning that trip from New York to California, the path you select will reflect your criteria, such as whether or not you are interested in the fastest route, the most scenic route, the cheapest route, etc. Accounting software varies in its user friendliness and flexibility. QuickBooks is highly flexible and very user friendly, which leads users to take inappropriate routes with a high degree of confidence! There are many ways to accomplish any given task. Making the right choice can be confusing, sort of like making the New York to California trip without the benefit of road signs (or GPS!). You must know the software.
Can you turn right on a red light in Iowa? Is the maximum speed limit in Kansas the same as that in Missouri? Is it mandatory to wear seat belts in Nevada? Do you have to turn on your lights if it’s raining in California? Just as you can get yourself into trouble while driving if you don’t know the law, you can get yourself in trouble in accounting if you don’t know the correct way to classify transactions. You must understand the basics of construction accounting.
The Bad News
The unfortunate truth is that most business owners come from the field. They started a business because they were convinced that they could do a better job (and make more money) than the company for which they worked. Unfortunately, many of the “improvements” they make are in the areas of production and customer relations; few have to do with the numbers side of things. Very, very few construction business owners come to the business with MBA or CPA after their names; most are more of the FEA (Field Experience Acquired) persuasion. And this sets the stage for unfortunate results on the office front. They don’t have the accounting background, they don’t know the software (which is often selected for them by their accountant or bookkeeper), and they haven’t stopped to plan ahead to determine what kinds of answers will help them steer their business towards a desired destination.
The Good News
Help is available! There are good, experienced, qualified resources out there who can either start you out right or help you adjust your course. The key is to look for consultants and trainers with experience in your industry and in your software of choice. Find out how many businesses similar to yours they have worked with. A construction expert who has only worked with development companies with revenue in excess of $20M may not be appropriate for a startup remodeling company with forecast revenue of $600K. Get references. Request a no obligation 15 minute phone call to get a feel for whether they will be a good fit for your business and you.
Final Word
If you aren’t getting the information you need, whether it’s answers about achieved margins, overhead costs, profit centers, or profitability of individual jobs, you owe it to your company and your own peace of mind to turn things around. If you’ve already started driving without a map, without knowing the traffic rules, and without helpful signage, STOP where you are. Don’t make things any worse. Get the help you need so the rest of your journey will be sure to bring you to your destination.
