Archive for September, 2007

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In an article titled How Contractors Get Rich, I introduced you to the six systems that control the fate of your construction business. In this article, we address financial control.

As a reminder one last time, they six systems are:

1. Marketing

2. Sales

3. Staffing

4. Planning

5. Tracking

6. Financial Control

Before diving into the details, let’s take a moment to discuss the role financial controls play in your business.

To start with, the purpose of having a business is to create more wealth than you would as someone’s employee. Since few things in life are riskier than owning a business, keeping a close eye on the financial end and taking care of all the annoying little accounting details is of utmost importance.

That said, financial controls perform a defensive role.

Sales and operations are your offense. They score the points. They earn the money. Without them you have no money.

Financial controls make sure you get to keep the money you earn. They keep you out of trouble.

If you listen to financial advisers and accountants, they will try convince you that the secret to business success is financial control. In other words, setting financial goals and watching their performance closely. They are gravely wrong. They have the cart before the horse.

The fact of the matter is if you can sell well, hire well, and organize your crews well, you are almost guaranteed to make money. At that point, the primary benefit of financial controls is keeping you out of trouble with the tax man and preventing someone from stealing your money.

You need control systems for:

BOOKKEEPING

Bookkeeping is defined as: the practice or profession of recording the accounts and transactions of a business. Bookkeeping involves paying bills and tracking income. Bookkeeping performs the six following functions:

PROCESSING PAYROLL

Payroll is the primary reason you may be better off hiring an outsider to performing your bookkeeping. Payroll is complicated and difficult.

It must be done by someone who knows what they’re doing. Otherwise, you risk getting in trouble with the tax man and the employees.

VERIFYING EMPLOYEES ARE PAID CORRECTLY

Your need a process for verifying your employees’ have recorded their time correctly, are being paid the proper wage rate, and are being paid on time. If you have a non-union shop that sometimes works on prevailing wage jobs, this becomes a much greater challenge and requires additional paperwork (certified

payroll).

MAKING FEDERAL AND STATE TAX PAYMENTS

The timing of tax payments varies with the frequency of your payroll and the size of your business. Your payroll system tallies up the amount of money that must be withheld from each employee’s paycheck and your additional payroll taxes.

Weekly, monthly, or quarterly you are required to make the state and federal deposits. Failure to due so leads to horrific penalties. You need a system to make sure that the money is being properly withheld and properly deposited (usually through your bank).

PAYING BILLS ON TIME

My former company’s bookkeeper was a master at hiding money so that when our quarterly taxes were due, she had the cash to pay them. She knew paying our bills on time was important to our owners. They hated late fees.

Few contractors can afford to pay the late fees associated with suppliers. The industry simply doesn’t give up enough profit to offset the 1-1/2% monthly interest rates suppliers like to charge.

SENDING OUT 1099′S AND W-2′S

By the end of January, your bookkeeper must have correctly filled out and mailed your employees’ W-2s and your subcontractors’ 1099s. I’m not sure what the penalties are for sending them out late, but you are required by the IRS to send them out by the end of

January.

COLLECTING EMPLOYEE INFORMATION

This may strike you as trivial but many it isn’t. You are responsible for making sure you hire legalized Americans. You are wise to verify your new hires are free of drugs. You need to get their correct mailing addresses and emergency contact numbers in case they get hurt on the job.

PREVENTING THEFT

Accounting procedures are designed to prevent someone from stealing your money without leaving tracks. If followed closely, accounting procedures even prevent theft by the owner.

Regardless of how much you trust your bookkeeper and employees, you need internal systems to monitor the handling of your money.

ENSURING SUPPLIERS’ BILLS ARE LEGITIMATE

Theft can be spun many different ways. You should consider any attempt by a supplier to over-bill you as theft. Someone needs to be checking supplier invoices for quantity and pricing against the original order.

KEEPING TRACK OF YOUR MONEY

Here’s a warm and fuzzy story for you. The founder of a mechanical contractor was forced to end his retirement and return to his firm after a successor had stolen over $1 million and disappeared.

You must have sufficient procedures in place to monitor the flow of your funds and to know whether money is disappearing improperly. That means keeping a close eye on your bank accounts and cash flow.

It’s pretty difficult to steal cash when it’s movement and use is being watched closely by someone not running the books.

VERIFYING LEASE TERMS AND PAYMENTS ARE PROPER

Lease companies are notorious for taking money that rightfully isn’t theirs. They do this in a couple of ways, their favorite being not telling you when you’ve paid the lease off. Yes, they actually let you keep making payments and have little clauses buried in their contracts that let them keep the money after you’ve mistakenly paid it!

Your bookkeeper needs to stay in close contact with the lease company and keep a separate payment schedule for each piece of leased equipment. It’s the only way to prevent being ripped off by one.

CASH MANAGEMENT

MANAGING YOUR CASH

About the only time small contractors have extra cash is just after the end of their season when their receivables keep rolling in but the labor and material expenses drop way off.

Every other time of year, decisions have to be made as to which bills to pay when, how much cash to hold back for tax deposits, and when new equipment can be bought.

You need to keep a close eye on your cash flow. A detailed cash flow budget is the easiest way to stay on top of your cash.

COLLECTING LATE RECEIVABLES

Here’s a nasty part of every business: going after your money when your client is dragging his feet on payment.

It really boils down to this. You had an agreement. You performed the services he hired you for. He needs to pay on time.

Failure to do so means he is not the type of client you want to be doing a lot of work for UNLESS he consistently pays a higher price than your other clients for the same work.

BUILDING AND MANAGING YOUR CREDIT LINE

Credit lines are essential for running a construction business. Many, many problems are created when you don’t have access to quick cash - which is what a credit line gives you.

You need a strategy for building a credit line equal to 10% of your annual sales.

Banks don’t hand them out like candy. You need to leave money in the business, which strengthens your balance sheet, and lowers the risk to your bank of default on the credit line.

FILING LIENS AND CLAIMS

Unfortunately, liens and claims are often a necessary tool in construction. Some building owners simply will not pay their bills until forced to. Liens create headaches for them. Claims, being lawsuits in most cases, are necessary when the liens are not working.

PROFESSIONAL SERVICES

DEVELOPING RELATIONSHIPS WITH BANKERS

You MUST develop a relationship with a banker who will go to bat for you. Not many will. You will have to hunt around, listen to their advice, and follow it.

If you do, they will help you solve cash problems when you most need their help. Otherwise, you will find yourself in a financial bind that is very difficult to escape from.

DEVELOPING RELATIONSHIPS WITH BOND AND INSURANCE AGENTS

I have found that bond and insurance agents are the most reliable source of insight and advice you can tap (myself excluded of course). These agents will help you keep your insurance costs down, process the paperwork you need for jobs, and guide the financial management of your business - all for free.

QUALIFYING AND EVALUATING YOUR CPA

Here’s the best tip I can give you: hunt down a CPA whose clientèle is almost exclusively contractors.

Construction accounting is so unique, the IRS actually has a different set of guidelines for claiming income. Few accountants understand the nuances of construction accounting.

Find an accountant that knows WIP inside and out (if you have to ask what WIP is, you have the wrong accountant). Find an accountant that understands the cost-of-goods sold needs to include equipment costs. Find an accountant that will advise you how to best handle the financial side of your business.

GETTING THE PROPER INSURANCE COVERAGE

Here’s where your insurance agent should come into play. You need to make sure that your coverage doesn’t leave any gaps that would leave you open to losing everything and you need to make sure you are not double covered when working for other contractors.

WE’RE DONE SYSTEMATIZING YOUR BUSINESS!

Yes. We’ve reached the end. In hindsight, isn’t it easy to implement the systems you need to run a real business?

Hardly.

If you’ve read the entire series of articles on How Contractors Get Rich, you’ve read roughly 30 pages, explaining the six systems your business needs. We didn’t even go into detail. Scary, huh?

That’s why so few contractors succeed in building real businesses, ones that keep the money flowing in while they’re away pursuing other activities.

That’s also why almost every business owner needs help (mentor, friend, business associate, coach) identifying and fixing the highest priority problems. Much time and money is lost focusing on problems whose resolution will not grow the business.

It’s your business, your life, and your decision.

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