In the course of a week I look at many P&L (Profit and Loss) statements from contractors, and many of those P&L’s have problems.
I’m not talking about red ink; when folks come to us for coaching or consulting, it’s often because they have financial problems and are losing money. I’m talking about the structure of their P&L that prevents them from knowing what they need to know to move forward with their business.
The purpose of a P&L is to give you a picture of your financial status. Some of you will argue with me and say that the purpose of a P&L is to provide information for filing a tax return.
You aren’t in business to file and pay taxes, you’re in business to provide a service and make a profit doing it. It is critical that you have the financial information you need to make decisions, because if you don’t, your business will fail. You need to file and pay your taxes, but pretending like a P&L is primarily for tax purposes is like pretending you started your business just to drive nails.
If your P&L works for the tax man but doesn’t work for you, your accounting is backwards. Find another bookkeeper or accountant. You need a P&L that gives you a clear picture of your financial status.
One common problem is the structure of the P&L. Your P&L should have five parts:
- Income or Gross Sales or Revenue, all funds paid to you by clients
- Cost of Goods Sold, also known as Job Costs, all direct job-related expenses
- Gross Profit, a calculated field, what’s left after subtracting Cost of Goods Sold from Income
- Overhead or Expenses, all remaining costs incurred by your business
- And Net Profit, a calculated field, it’s what’s left after subtracting Overhead from the Gross Profit
(Chapter 2 of Markup & Profit Revisited, “Building a Financial Foundation” discusses each of these five parts in depth.)
I’ve seen P&L statements that don’t bother to separate Job Costs from Overhead Expenses. If you don’t know which expense was incurred to build a specific job, and which expense was incurred to run your business, you’ll never be able to make decisions about how to price your jobs.
Another problem is that there isn’t any owner’s salary. I know that many businesses are struggling financially, but you need to realize that going too long without a salary will cause you harm.
Cardinal Rule #10 is “You shall take a fixed salary from your business every month”. If you don’t pay yourself, you aren’t being fair to yourself or your family. Don’t tell me your profit is your salary. If that’s what you are doing, you’re shorting yourself.
Your salary is what you are paid to operate your company. Look at it this way — if you aren’t able to run your business, you should be able to take that salary and hire someone else to do it.
And your salary needs to appear on your P&L. If you are working on jobs, then pay yourself for your time on jobs just like you’d pay an employee to do that same work, and show the cost under Cost of Goods Sold. Then pay yourself a smaller amount to own and operate your business, since you are only doing that on a part-time basis if you are working on jobs.
Value your time. Be paid for the time you are spending on your business. Your profit is what’s left after all the bills are paid, and your salary is one of those bills that needs to be paid.