Good management depends on the ability to quickly spot problem areas and make necessary corrections. That's true on the jobsite and in the office. Imagine being able to read your income statement in a few minutes and pinpoint important variances right away. But a profit-and-loss statement has so much detail that it's often difficult to spot problems.
December is the perfect time to simplify your P&L. The process involves reorganizing all your accounts under a small group of “primary accounts.”
Income Start with a primary account called “Remodeling Income.” To ensure an accurate gross profit margin, list only income resulting from projects. (Put other income, such as interest, rentals, or payment for equipment sales, into Other Income/Expense. For a full explanation, download the P&L Cleanup spreadsheet here.) If you want to track income on time-and-material as well as on fixed-price jobs, create a primary account for each. But don't track different project types, such as kitchens or baths, in your P&L; use a job-cost report instead.
COGS On the expense side, let's look first at Cost of Goods Sold, a common area of confusion that will greatly benefit from our cleanup. Most estimators use a set of work divisions or phases that more or less follows the order of construction — earthwork, foundation, framing, and so on. This is more detail than we need for the accounting side, however, so condense the list by assigning each construction cost category into one of the following five primary accounts shown.
Overhead Indirect costs present the final, and greatest, opportunity to clean up your income statement. Again, the reorganization involves assigning detail accounts to a very few primary accounts. I suggest the following: Marketing/Sales, General/ Administration, Overhead Labor, Travel/ Entertainment, Professional Insurance, Education, and Vehicle.
Some accounts need sub-accounts; Overhead Labor, for example, has the sub-accounts Wages, Payroll Taxes, and Benefits. Others, such as Marketing and Sales Expense, may even have sub-sub-accounts.
With your P&L reorganized, the important numbers will jump out at you. The detail will still be there, but it won't be in your way. — Judith Miller is a Seattle-based construction business consultant and trainer specializing in accounting, finance, and computerization.