For many of us, we get our final profit and loss statement and balance sheet from our accountant somewhere between Feb. 1 and March 10. Every year it is the same; the previous year has come and gone and then we find out how we did. If it was good, we are told we made $20,000 last year (by the way where is it anyway?), or that we lost $5,000 (I knew things were not going well).
Finally, we have in our hand a nicely bound booklet from our Certified Public Accountants (CPA) that tells us about the performance of our company over the past 12 months. This document tells us what our sales were and how much it cost us to install all that equipment and material we purchased. The document shows right there in black and white that our gross profit was X dollars. This document lists all our business expenses for the year and it shows us our bottom line, the profit or loss.
You may be thinking, yep, I get one every year. I look at it for a few minutes and put it in a file never to be seen again!
Did you ever think about why it is that you would pay someone from $1,500 to $2,500 or even more to create a document and then file it away forever? I can hear you now: “Why? They make me do it! I am required to produce a document in order to figure out how much I owe in taxes. City taxes, state taxes, and federal taxes have to be paid! That’s what CPAs are for, right?”
While taxes are certainly an important part of what they do, it is just a part of what your CPA should be doing for you.
I suppose it really isn’t the CPA’s fault that they give us these worthless, yet beautifully bound reports each year. Yes, you read it right, but I believe that most of you receive a financial statement that is worthless as a tool for making business decisions. Your accountant has produced a document that is great for calculating your tax liability, but that is about all.
Now, I’m sure they think they are really doing their job. After all, they are only taking the information you have given them and organizing it into a format that is totally confusing. They are the professionals here, aren’t they? Accountants are professionals. However, many of them have made the following assumption: They think their job is to do your taxes!
Now I am all for them doing a great job of saving us every legal tax dollar they can. We should take advantage of every legal savings that they can find for us. The problem here is that a “tax” document is not the same as a “management” document.
FINANCE GOT YOU SHAKING YOUR HEAD?A management document (by the way, you should get one every month) presents all the numbers in a manner that accurately describes what has gone on in your business, and in a timely manner. It really is that simple. You need to know what is happening in your business.
The most common method of accounting for our industry is the cash method. The other method is the accrual method. Both have advantages and disadvantages too numerous to detail here.
If you read my last article (“What You Don’t Know Can Really Hurt You,” Oct. 9) about the “90 percenters”, and you were in that group, then your accountant probably has you set up on the cash method. The cash method may work just fine for tax information and may let you delay paying taxes, but as a management tool it has limited value.
Think about it this way, if you are on the cash method, maybe you can delay paying taxes this year and if you are lucky, you won’t make any money next year, so you won’t have to pay taxes then either. What a concept! (Sorry about that, I just couldn’t help myself.)
WHICH METHOD DO YOU USE?If you record or count your sales when you get paid, then you are on the cash method.
If you record or count your expenses, when you pay them, then you are on the cash method.
The problem with accounting as described above is that each monthly statement is skewed.
Example:Suppose you sell a job on Oct. 26 and install on Oct. 30, and you receive and record the payment Dec. 10. You had purchased the equipment and materials to install the job back on Oct. 3. You actually paid for the equipment and material Nov. 10. You paid for the labor spent on the job on Nov. 3. (See Table 1.)
What is wrong with this picture? The sale doesn’t show up when it occurred (October). The expense doesn’t show up when it was incurred (October).
The sale still does not show up in November. All the expense shows up in November. November is a disaster!
The sale finally shows up in December. No expense is recorded in December. December is showing all income and no expense. December looks good!
Now I know you are not necessarily trained in accounting, but if you are going to the trouble and expense to keep up with where your business is, do you think you are getting your money’s worth? If you are on the cash method, here is an idea: You could paper the bathroom wall with the financials you are getting because they are simply not correct and are of no use to you as a management tool. It’s no wonder you only look at them for a few minutes and then file them away forever.
Who among you think that GE, Sears, McDonalds, and Wal-Mart, or even the most successful contractor in your area, is using an accounting system as described above? None of them use the cash method and you shouldn’t either. The purpose of accounting is to record what is happening and when. Period!
Look at Table 1 to see how the accrual method can make a big difference in your financial reporting. This method reflects when the sale was made and when the expense was incurred.
Please give some thought to this accounting method stuff. This is a serious problem for our industry. Get out of that “90 percenter” group and join the other 10 percent.
Ligon’s Law:“If you keep on doin’ what you’re doin’, you will keep on makin’ what you’re makin.’ ” You might want to discuss this with your accountant or contact me.