Variety can be a good thing, but remodeling companies that want to measure their performance against standards need to be on the same page. To help remodelers align their bookkeeping practices, we're temporarily hijacking this department under a “Back to Basics” theme. We discussed revenue in January and direct costs in February; now we turn to overhead.
COST OF DOING BUSINESS In addition to lumber, labor, subcontractors, and everything else required to build remodeling projects, you have expenses for things that keep your business running. You pay telephone and Internet charges, legal and accounting fees, and a host of other expenses that can't be pegged to a particular job.
Taken together, these expenses are called “overhead,” and carefully tracking them ensures that they are included in the selling price of your services. Although overhead is relatively stable, it's important to understand how certain decisions — move to a larger office, hire an office manager, or buy a new truck — affect overhead and, ultimately, your bottom line.
CHART OF ACCOUNTS I recommend grouping overhead expense accounts under primary headings. [For a sample chart of accounts, go to www.remodelingmag.com/webextras.]
Marketing and sales. Group all expenses related to finding and selling your revenue-producing work here. Include the cost of simple marketing materials, such as business cards and letterhead, as well as design, printing, and postage expenses for a direct-mail piece. Sales-training expenses also go here, as does the cost of photography for a presentation book. Taken together, these expenses will show you how marketing and sales relate to revenue, giving you an accurate picture of what it costs to generate work.
Small companies often rely on word of mouth and spend almost nothing on marketing — a strategy that has its drawbacks, as some are currently discovering. But many remodelers annually spend between 1% and 3% of revenue on marketing. Some, such as window replacement contractors, spend 10% to 15% or more to generate leads.
G&A. “General and administrative” expenses relate to running the office. They include office rent, utilities, office equipment warranties, and similar expenses that keep your doors open whether you have a six-month backlog or are down to your last job. This is also the place to put fees for an attorney, accountant, or other professional.
Overhead payroll. Labor costs for an office manager, bookkeeper, or receptionist should be posted here. Some employees, however, such as estimators and production managers, split their time between specific projects and general work that can't be billed to any single job. As discussed in the February issue, labor costs should be posted as direct costs to specific jobs whenever possible. Otherwise, those expenses go here.
Taxes. Only income taxes paid go here; business license taxes go under G&A. Payroll taxes should be included in labor expenses posted to specific jobs as a direct cost or to the overhead payroll account.
What about cell phones or expenses for company vehicles? Put them in G&A for now, but we'll discuss another way to account for these expenses in a future issue. — Judith Miller is a Seattle-based construction business consultant and trainer specializing in accounting, finance, and computerization.
Not all non-field payroll belongs in overhead. What if an owner takes draws that aren't expensed? What if a spouse works as an unpaid bookkeeper?
To track your true labor costs, post the owner's field time to a line called “Owner Field Salary Equivalent (SE)”; post both owner and unpaid-spouse office time to a line item in overhead payroll called “Owner SE.” At year end, your accountant will transfer these costs into a draw account, but until then you'll have accurate labor costs.