By Ruth King
I reviewed the financial statements for a client and saw they had a terrible month – worse than I’ve seen in a long time. They were busy and I thought profitably busy since I had helped them establish their pricing.
When I asked what happened, the answer was, “We bought $100,000 of equipment and didn’t start the work until the following month. That’s it…$100,000 in expense with no offsetting revenues.
Because of the way it was accounted for, the next month was phenomenal…too good! I knew what had happened so I averaged the two months.
One of my favorite sayings is that you have to match apples to apples. That means that you have to have revenues matching expenses. (If you don’t, I call it “apples to oranges”). If you put revenues in one month and expenses in another month, then you are fooling yourself. The month with the revenues and no expenses will be a great month and the month that has the expenses and no revenues will be a bad month in terms of your financial statements. So, watch the work at the end of the month. If you have the expenses in one month you need to have the revenues which offset those expenses in the same month.
The easiest way to check is to look at your gross margin. If the gross margin is not consistent from month to month, you have a problem. If you know that you have revenues and expenses in the same month, then you dig deeper and resolve the minor issues before they become major crises. In addition to the situation above, here are 6 things that could be happening.
1. Inconsistent pricing on jobs. One job you bid a 45% gross margin. The next job you bid a 30% gross margin. The third you bid a 20% gross margin because you want the job and you think that it will lead to others…it may or may not.
2. You miss project estimates. This means that you bid 12 hours on a project and it takes 16. Or, on the positive side, you bid 12 hours on the project and it takes 8. Either way, your gross margin will be affected based on your bid price.
3. There are a lot of callbacks or warranty expenses. You have additional expense with no revenues against those expenses. In the case of warranty, you may recover part of the expense when you submit warranty claims. In the case of callbacks, you have a very little chance of recovering the expenses. This decreases your gross margin.
4. You have situations where the customer pays regular prices and you are paying your employees overtime because you are behind. This means that you can be busier and make less money.
5. You get a large stocking order and expense it. When you order materials for future use it is inventory until you use it. You need a revenue to offset the materials expense.
6. You have outright theft. Employees don’t charge customers for materials they use. Or materials disappear. Hopefully, this is not the case in your company.
Ruth King is known globally as the “Profitability Master,” and is a a thought leader in entrepreneurship and business. Her books have been recognized as among the greatest in numerous industries. Learn more about all her business activities here.