PCA Articles

Get a handle on your budget and financial statements in a way that works best for your contracting company – not just your accountant.

When you’re running off your feet trying to keep up with an onslaught of jobs, it’s easy to assume your business must be rocking.

But do you know it for a fact?

Busy-ness doesn’t necessarily equate to a flourishing business and, once they finally look at their numbers, many contractors are surprised to discover they’ve been carrying a false sense of success.

Assuming they even bother to look.

Financial statements can be, ooooh, shall we say… a little intimidating?

But managing your company’s finances is key to being a good leader and setting your company on a path to substantial growth.

The advice in this article comes straight from the masters – accountants who work specifically with the trades, and contractors who’ve been there, nailed that. And if terms like cashflow cycles, profit margins, and overhead expenses make your head hurt, don’t worry. We’ll lay them out along the way.

Now, sit back and relax while we go full money nerd on you.

#1 – Use the right type of accounting

Contracting businesses are operationally complex, more so than even most owners fully appreciate. There are multiple active sites to manage, supply chain struggles and weather shifts to contend with, subcontractors and vendors with unique payment structures, not to mention equipment, insurance and licenses that need to be purchased and maintained.

(Jeez. It was exhausting just writing that. You must be downright shattered, dealing with it day after day.)

But you can see how juggling cash flow cycles for both projects and overhead costs means that construction and trades businesses require special attention when it comes to accounting. Which is why not any old accounting will do…

Tax versus management accounting

If you’ve been operating for a while now you probably have an accountant or bookkeeper in place. But are they presenting you with tax accounting or management accounting?

Let’s dig into the difference:

• Tax accounting – Arranges financials for the government, who wants to see the numbers a particular way.
• Management accounting – Arranges financials in line with how your business actually operates.

All accountants worth their salt will know the difference. What matters is which type they put in front of you. Most accountants are consumed with tax accounting, and for good reason. You don’t mess with the taxman. Or woman. Don’t mess with either.

According to Leeroy Beeby, co-founder of Check The Level, an accounting firm dedicated to supporting contractors, the problem with tax accounting is that it puts undue pressure on you to know your way around balance sheets, cash flow reports, and profit and loss (P&L) statements.

Those documents are primarily designed to give the government a sense of how you’re performing from a tax perspective. But management accounting presents the numbers in a way that’s more related to your operational performance and helps you make better business decisions.

Don’t get us wrong, both are important (again… definitely pay your taxes), but a good accounting firm should be able to provide you with straightforward management financials that they can then translate to tax-ese for the government.

⚠️ Quick check: Has your accountant asked which departments your staff are in?

If not, your gross profit is likely overstated. Payroll often gets lumped into overhead, but in contracting businesses, field labor and office staff costs shouldn’t be handled the same way.

Curious to delve deeper and discover how a solid financial system can help take your contracting business to the next level? Watch this On-Demand Web Class… all killer, no filler; promise.

The class will be chock full of Financial Secrets, like the ones that helped Mason Marquis take his company, Spray Tex Painting, from a negative to 10% net profit margin in four years.

#2 – Make your budget match your business

Ugh. Budgets. Buh-dgets… yeah, we get it.

You inherently know you need a budget, the way you know you should eat more kale. Regardless, you may still be among the 75% of contractors who don’t have a formalized budget.

We can’t help you with the kale, but here are a few reasons why having a budget is important:

• ✅ Purpose – Budgets are fundamental to running a profitable business, and if a business isn’t profitable, it isn’t serving its purpose.
• ✅ Strategy – Budgets are intrinsically linked to strategic plans, and it’s virtually impossible to navigate properly without one. If you’ve got a budget… you’ve got a plan.
• ✅ Decisiveness – Making decisions is a business owner’s main responsibility, and budgets allow you to be more decisive since you’ll know what you have the dough to do.
• ✅ Recruiting – With a budget, you’ll know when you’re able to hire the staff you need, and whether you can afford to adequately reward them so they’ll stick around.
• ✅ Leadership – Budgets will help you develop and learn from your mistakes, plus you’ll have data to rely on, instead of only listening to your gut. Though certainly don’t ignore it.
• ✅ Destiny – It might sound crazy, but we know hundreds of contractors that can attest to the power of putting an annual financial plan into action – the universe responds.

Much like the accounting approach itself, your budget will be far more effective if you customize it. Which you can totally do.

Own your chart of accounts

When it comes to the financial management of your company, there’s no escaping P&Ls completely. (Sorry.) However, it is in your power to structure them in a way that best suits your trades business.

P&Ls are based on a chart of accounts – basically a list of categories – that fall into one of three main buckets:

• Revenue – All the ways you generate income for your business.
• Variable costs – Project-related spending, including onsite labor, materials, and subs.
• Fixed costs – Overhead expenses like software and office staff, that stay pretty steady month-to-month.

Within those groupings, you can call the accounts whatever you want. Do you give out paintbrush-shaped collar tags for your team’s dogs every year? No problem. Make “Dog tag swag” a line item. You can go that granular.

To learn more about the nuances around structuring a chart of accounts, listen to the enduring insights from business guru and Breakthrough Academy co-founder, Igor Trninic, in Episode 14 of the Contractor Evolution podcast.

⚠️ Quick check: Are you mixing your business and personal expenses?

As you progress into the world of financial management, you’ll want to be sure to separate your business from your personal life. Don’t use personal assets for work purposes and, as much as possible, don’t use personal credit cards to pay for business expenses.

Money doesn’t have to be complicated. To help you out, we’ve got a Budget Quick Tool available free in our Live Financial Controls Web Class. 

With the Budget Quick Tool, you’ll get a grasp on your numbers in no time. Andrew Chisena has discovered the value of budgeting over the past two years as he grew his company, Gables and Grove Painting, to a stellar 20% net profit margin.

#3 – Know if you’re winning

Okay, you’ve got a budget. You’re tracking your expenses. You can see how you’re doing. But how do you know if it’s good or not? What does “good” even look like?

You need profit margin benchmarks.

The benchmarks

There are two ways to look at these:

• Gross profit margin – This metric shows how much you’re making relative to what it costs directly to make that revenue. It’s essentially the money you make off of your projects, BEFORE overhead. If you sell and produce a job for $10,000 and it costs your business $6,000 to complete it, you’ve made $4,000 or 40% gross profit.
• Net profit margin – This percentage metric shows how much you’re making relative to your total costs – overhead, project… the whole shebang.

Both have their uses, but for now we’ll focus on net profit margins. For beginners, a good rule of thumb is to aim for a net profit margin of around 10%. In reality, however, most land somewhere between -2 and 4%.

But these numbers will differ slightly depending on the trade. With painting, for instance, you can shoot for a higher net profit, like 12% or 15%, because of the healthy gross margins available and lighter overhead burden compared to other industries.

⚠️ Quick check: Do you know where your profit centers are?

It’s not uncommon for contractors to misjudge where they’re really generating their profits. For example, many painters mistakenly think they make their money on big-ticket new construction contracts, when in fact it’s run-of-the-mill residential repaints that pad their bottom line. The point is, you don’t know until you measure.

#4 – Don’t fight the fail

After your first year of creating and following a budget, we’re gonna save you the agony and just tell you what’s going to happen.

You’re gonna bomb.

Simple as that. You won’t meet your budget. And – deep breath – it’s absolutely fine.

At this stage, it’s not about matching every cent you planned. It’s about tracking and gathering data. The important thing is, now you know what you’re spending, and where.

You will get more accurate. Stick with it. Like cutting in at the top of a wall without getting paint on the ceiling… budgeting is a skill, and it takes time to hone.

Fix your financials

These practices can help you avoid breaking your budget – and keep it from breaking you.

💡 To plan your future, look to your past

Putting a budget together is much easier when you have your previous year’s financials to work from. If this is your first year, start with what you’ve got, even if it’s just a ballpark revenue.

💡 Beware shiny objects 

These are the whim purchases, like a fancy new truck or that new sprayer, that blow your budget to smithereens. There’s a difference between a budgeted capital investment and a random impulse buy. One is planned for and delivers an ROI, the other does not. So before splurging on something fancy ask yourself: was I thinking about this a month ago? If the answer is no, it’s a shiny object.

💡 Mind your overhead

Fixed costs for things like your office staff, shop, or vehicles, need to be paid whether you’ve got money coming in or not. But keep an eye on them. They easily creep up if you’re not careful.

💡 Work backwards

Come up with an accurate revenue plan by figuring out your average job size, how many jobs you need, and how that equates to the number of estimates you’ll need to close.

💡Embrace accurate job costing

Job costing is a more advanced method of tracking your finances, and it can seriously amp up your visibility into aspects of your business, such as how efficiently it’s operating.

💡Get into reviews

A budget does you no good if you never refer to it, so make a habit of doing monthly, quarterly, and annual financial reviews. Then adjust as needed. It’s a budget, not a slab of concrete.

It’s your business, and you owe it not just to yourself, but to your team and any potential future owners to understand your financial picture. While no one expects you to become a CPA overnight, these concepts are well within your capability. It’s basically grade 8 math. Hardly rocket science.

And remember… the numbers are simply meant to guide your plan, not cloud your vision. As any good painter knows: don’t overwork it or you’ll ruin it.

You’ve got this.

Want to discover how Breakthrough Academy contractors increase their net profit (yes, net) by an average 43% after 12 months? Check out this On-Demand Financial Controls Web Class with free take-home financial templates!

Get in touch to start your own journey towards higher profits, lower stress and happier teams.