Mission: Vacation Financials: Showing You The Money

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At Nolan Consulting Group, we coach and guide our clients in correlation to the 7 Critical Elements of Business Success™, a set of seven distinct areas that  eserve primary focus for business growth and development. One of our 7 Critical Elements, financial management, is a topic that we believe sets us apart — our emphasis on highlighting the importance of understanding, watching and making future operational decisions based on the financial health of the business is second to none. The numbers tell a story, and if you’re not reviewing them on a regular basis, there will be a huge hole in your story’s plotline! We often find that contractors who are masters of their trade don’t look at their numbers on a regular basis — becausethey often see it as a burden, confusing and sometimes hard to make sense of. We want to stop that mind trap — knowing your numbers is nonnegotiable and we’re here to help.

The Number Story - In working with Eric Craine through the Mission: Vacation process, we recognized financial management as an area in need of direct improvement — so understanding the numbers and getting a grip on the number story have become another of All-Ways Painting’s Big Rocks! In our last article, we highlighted recruiting and hiring as a Big Rock for Eric to work on. Big rocks — the critical success areas where we choose to act — get served priority timing with action planning, time management and strategy. The small day-to-day stuff will find a way to fit within.

To focus on this rock, Eric has been working closely with Nolan Consulting Group coach and financial specialist Andrew Amrhein to gain a better understanding of his numbers, to restructure the process of reporting and to learn how to delegate roles within accounting. As they dove into the books, they focused on implementation of the following items:

Rearranging the P&L - For a monthly review of the profit & loss report, it’s critical that the chart of accounts in QuickBooks is arranged to be more meaningful for accurate analysis. We want to have a conversation about the numbers every single month and know that what we’re looking at is relevant and true! Does  our chart of accounts accurately reflect how your business operates?

Focus on the balance sheet - Outside the daily and monthly operational costs that the P&L displays, the balance sheet provides a more detailed look at the financial health — the bank accounts, the assets and liabilities, and the key performance indicators (of which we’ll jump into a little later)!

Delegating tasks - Who should do what? In working with Eric the past several months, he’s added a bookkeeper so he can separate roles and responsibilities. As the owner of the business, one of the easiest ways to get stuck in the hourglass — where everything funnels through you — is to get stuck in owning the accounting side of the business. We recommend hiring someone you trust to do that role — trust and delegate, but check in. You should be reviewing the P&L and balance sheet on a regular basis, but not dealing with QuickBooks daily and handling invoices.

Revenue cookbook and forecasting production - Using Feet on the Street (FOS) and hourly revenue goals, we can work on a production forecast to help us break down the details of what it will take to hit our budgeted monthly revenue goals! Utilize the data you have to help forecast future work and FOS needs — which in our case connects to Eric’s other Big Rock — Recruiting and Hiring!

Metrics to keep focus on

In addition to the items we’re working on with Eric in regard to his financial management of All-Ways Painting, there are other metrics and tools to use to help manage the economic health of your business.

While the first step is creating an annual budget — we encourage you to be open to reforecasting. This year is a prime example: curveballs are thrown at unexpected times. If you need to stop and redirect, that’s okay. Take your original budget, create a “save as,” then adjust and move forward.

Knowing when to reforecast can often be aided by the routine of a monthly review of revenue, gross profit percentage and overhead as well as a more weekly or daily routine of some common KPI’s. The goal is to give yourself a quick snapshot of where your company stands. If something is off, you can dig into the details. If the numbers are on, keep moving forward!

Some examples of KPIs that Andrew Amrhein highlights include:

Labor hours per week: (payroll hours for field employees). As service companies, what we sell are hours. Some of you paint, some build, some landscape, some pave and more, but all of it is done through time. How many hours will you need each week to hit your revenue goals? Some companies go a step further, watching Labor Hours per Day. Based on the budget you did, this number ought to change through the year based on seasonality. If you’re not hitting the mark, consider adding field employees and/or adapting your sales strategy.

Revenue per hour: (revenue divided by field payroll hours). If you’re achieving the hours you need, the next question is “Are those hours profitable?” In other words, are jobs coming in happy and under? Rev/hr helps you understand profitability. If you are hitting your goals, there will be enough dollars left over for overhead and profit. As demand grows during the season, are you achieving the higher rev/hr you’ll need to be profitable? If not, what might you do to improve?

Average labor wage: (field payroll divided by field payroll hours). This metric gets at having balanced crews and a balanced field overall. Incorporating lower-paid apprentices and laborers can do wonders for your profitability. It allows the experienced members of your team to stay focused on complicated tasks, improving the quality of the job. What’s more, it brings in younger and/or less experienced employees, the foundation of your company’s future. You will need to decide what “balanced” means for your company. We highly  ecommend asking yourself if you’re making the most of this opportunity.

Current ratio: (current assets divided by current liabilities). This metric comes from the balance sheet and measures your company’s ability to pay short-term payables. (Shortterm would include payroll, monthly bills, materials — basically anything due within 12 months.) A score of less than 1.0 would indicate you’re having trouble paying bills. A score greater than 1.0 would indicate paying bills is getting easier. Generally, among trade industries, I’ve seen a score of 1.5 be the starting point for leftover cash starting to build in the bank account. Squeeze every penny until you’re at 1.5 or better. When you do decide to spend some money, make sure it does not push your score below 1.5 for too long.

Days receivables: (receivables divided by revenue per day). The question here is “Are you converting your invoices (i.e., completed jobs) into cash fast enough?” The higher your accounts receivable, the longer you will likely need to rely on other sources of funding, like credit cards and a line of credit. For residential work, we typically benchmark a score of seven days or less. For commercial-type work, the benchmark is 30-45 days. If your score goes higher than these benchmarks, it’s time to dig in to who owes you money and why. For example, what percentage of receivables are greater than 90 days? What can you do to go after them?

During this particular period when the future is uncertain, we have to think about how long your business might be able to operate in another economic  ownturn or work shutdown. Andrew encourages knowing the following numbers to help give you a better idea:

  • Revenue per day: How much revenue is your team producing per day? Using revenue per day, you cancalculate two of the most important Indicators KPIs:
  1. Days receivables = receivables/rev per day
  2. Days cash =  cash/rev per day

Know these numbers through and through. Post them for your team and get everyone involved in improving them, even if they’re just cheering others on to help support an energized goal. Our recommended best practice would be to always have at least 30-plus days cash on hand, with two months of overhead in reserve to keep your business  repared for the unknown. This is the time to know your numbers, build your cash savings and be smart about the future.

Last, use your team’s power…delegate and create opportunity by picking some key line items in your budget for someone else on your team to track and review. Give them the  ower to review the costs regularly and bring suggestions or changes to you for approval.

Knowledge is power

Using the guidance above, utilizing the team and asking questions are all part of putting your business on track for strong financial management. Remember, as the business owner, you want to be making decisions that will allow you to step out of the hourglass and work on the business. Knowing your numbers will help you do this — your decisions will
be backed by data! We’ve seen this empowerment happen over and over with our clients, and we’re now seeing Eric take the reins too. He is well on his way to knowing his numbers and being able to make better decisions based on the real-time financial health of his business.

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