The basis for good financial data
The basis for good financial information starts at the job level. Every piece of paper, receipt, packing slip and time card, etc., generated from the field must be properly coded to the right job, piece of equipment and overhead account. Likewise, paperwork coming into the office must be properly coded to the appropriate overhead accounts (i.e. phone bills, advertising, insurance, etc.).
As a minimum, costs must be separated and tracked into either ‘cost of goods sold’ (COGS) or ‘expenses.’ However, individual job costing is ideal. If you track job costs separately, you can not only track your company’s overall profitability, but also see which jobs are making and losing money. If you are able to get down to the job level, then you have time to identify problems on project sites before they get out of hand.
For instance, if you are halfway through a two-month project, which was estimated at 2,000 labour hours and 1,500 have already been exhausted, you will know there is a problem and there still might be time to take corrective measures and/or determine where the problem lies and why it is happening. If you are not tracking individual jobs, then you can only compare the performance of the overall company to the budget.
This still allows you to manage and control your overall business; however, you will not have any decisive information as to which projects are doing well and which are not.
For this to work, it is critical for every document concerning company finances be processed and entered into your accounting system. Many businesses make the mistake of holding onto certain paperwork because they believe there is an error, e.g. an amount owing on an invoice. However, even if an invoice is wrong, you should still enter it into the system and then deal with it afterwards as an adjustment or credit. If the invoice is not entered, then the accounting data on that specific invoice will not be accounted for in your regular financial statements (i.e. profit and loss [P&L] statement). If the amount is significant, and/or several invoices were not entered, then your P&L statement will show an inaccurate profit. This can be extremely dangerous, especially in larger companies, where different people compile and review the financial information and statements.
For instance, if you are not aware $50,000 worth of invoices are being held back, and therefore do not show on the P&L, then you may think the company is more profitable than it really is. It is far better to be on the conservative side and input an invoice owing, which shows more than what is truly owed. Chances are the invoice is not out by much and once the adjustment/credit is applied, it will provide a positive boost to your P&L statement.
Creating a realistic budget
Creating a realistic budget is probably the most important thing you will do in your business on an annual basis. Many new/inexperienced business owners are hesitant or afraid to put together a budget, mainly because it is new to them and they are not fully aware of how important it is.
In some cases, a company can be in business for more than 10 years before realizing the importance of budgeting. It is possible for a company to operate without doing a formal budget; however, besides being very lucky, it is quite possible they are following some type of informal budget. More than likely, they are also working harder than necessary with the need to react to various issues each day, rather than proactively pointing the business in the right direction.
Due to the seasonality of the pool and spa industry, and the extremely tight profit margins, a budget is essential. In other industries, which operate at much higher gross and net profits, it is quite plausible for them to succeed without a formal budget since there is enough extra profit in the business to absorb unexpected problems that can erode profits.
Many people put budgets together because it is something they have to do as part of their job responsibilities. Even though this is better than not putting one together at all, it is not the right reason to compile a budget. A budget serves many purposes, for example:
- It forces you to sit down and actually think about how you are going to embrace the upcoming season;
- It is a roadmap or plan for your company to follow in its attempt to achieve business goals in the upcoming year;
- It is a plan for profit; and
- It is a tool to help steer your company.
