Do You Have the Courage to be Profitable?
Originally published: 01.01.13 by Ruth King
Once you understand your financials and start consistent monthly reviews, you must boldly implement changes based on what you see.
As an entrepreneur, you had the courage to start or purchase a contracting business. You must have courage to profitably grow and survive. Survival takes understanding the financial part of your business, including cash flow and what profit really is. Then it takes implementing a monthly financial review (less than 30 minutes each month) and taking action based on what the review tells you.
This is a simple three-stage process.
Stage 1: Understanding the financial part of your business
Learning the financial part of your business is like learning your ABCs.
When you were a kid, one of the first things you learned in school was your ABCs. You kept at it (usually because your parents drilled them into you) until you knew them. Then you turned those ABCs into words. Words into sentences. Sentences into paragraphs. Paragraphs into books.
In the beginning, your ABCs were hard. Then they became easier. One day you knew them! You were really proud and usually wanted to recite them to anyone who would listen. You were excited because you could form words and read. A whole new world
Learning the financial part of your business is the same. As adults we don’t have our parents to keep hounding us until we learn something. We just have our desire for profits, cash, financial freedom, and other goals we want to achieve.
What do you have to learn?
• What a balance sheet is and what it means.
• What a profit-and-loss statement (P&L) is and what it means.
• What cash flow really is and what it means.
• What overhead cost-per-hour is and how to get it as low as possible.
• Then decide what profit-per-hour you want to earn.
Stage 2: Implementing your monthly financial review
Now that you understand the financial part of your company, take less than 30 minutes each month to review your P&L and balance sheet.
First, your financial statements must be timely and accurate. It does you no good to receive January’s statement in April. Whatever minor issues you would have spotted in January will have become major crises by April.
If your statements are not accurate, you can’t make good business decisions. You need to get accurate financial statements by the 15th of the following month. So, January’s statement should be in your hands no later than February 15th.
Calculate 10 operating ratios (current ratio, acid test, accounts receivable to accounts payable, debt to equity, long-term debt to equity, compensation percentage, receivable turns, receivable days, inventory turns, and inventory days). These ratios tell you what is going on with your business. Do you have a collection problem? Can you pay your bills? Are you taking on too much debt? Are your employees productive? Do you have too much inventory? (To read more in-depth instruction from Ruth on how to track these ratios, review her columns from May through August of 2013 at www.hvacrbusiness.com.)
Then look at the trends — which you see with trailing information: Reviewing a year’s worth of data one month at a time. Look at trailing sales, gross profit, overhead, and net operating profit. What is happening long term with your business? Are you getting more profitable? Are sales decreasing? Is overhead creeping up?
Stage 3: Implementation
Once you do your monthly review, take action based on what your ratios and trailing data are telling you. Quite frankly, this can be the most difficult part. If the data shows that a department is constantly losing money, you must turn it around or eliminate that segment of your business. This is hard, especially if employees in that department have been with your company for many years.
Have the courage to be profitable. Take action on what your financial evaluation reveals. If you don’t take action, you could watch your company slip into bankruptcy.
Ruth King has over 25 years of experience in the hvacr industry and has worked with contractors, distributors, and manufacturers to help grow their companies and to become more profitable. She is president of HVAC Channel TV and holds a Class ll (unrestricted) contractors license in Georgia. Ruth has authored two books: The Ugly Truth about Small Business and The Ugly Truth about Managing People. Contact Ruth at firstname.lastname@example.org or 770-729-0258.
Articles by Ruth King
Understand Your P&L Statement: Gross Margin
Understand Your P&L Statement: Cost of Goods Sold
However you decide to categorize expenses in your P&L, it's important to be consistent.
Understand Your P&L Statement: Sales vs. Revenue
Sales are critical to survival — when revenue is actually generated is even more critical.
The 20 Percent Profit Myth
For a realistic goal, include owners’ compensation in the net profit equation.
Rethink Your Bonus Strategy
Enact a profit sharing program, rather than a bonus entitlement.