Businesses fail. It happens, and according to the U.S. Department of Labor, 50 percent of small businesses fail in the first four years. There are several reasons why this statistic is true, but what many contractors forget as they masterfully install or repair HVAC systems is that a basic understanding of accounting principles is required to run a successful business. That doesn’t mean it’s time to halt the business and head back to school for an accounting degree. But it does mean that handling money effectively is imperative to the overall business equation, and that is not something that should be left to chance.
Understanding that contractors are busy, The NEWS talked to both accounting and HVAC industry experts in an effort to improve every contractor’s chance of business survival. Here are five tips contractors should consider in order to effectively manage their finances and help fail-proof their businesses.
KNOW THE BASICS
Accounting is considered the language of business, according to the U.S. Small Business Administration’s (SBA’s) online course Introduction to Accounting. The free course found at www.sba.gov/training allows users to work through basic accounting terms and concepts in 30 to 60 minutes.
Based on the training, there are two accounting types: cash and accrual. Cash accounting tracks when the money is received and when it is spent. The course compares it to the tracking that would be done in a personal checkbook. Accrual accounting is more complex and counts transactions immediately, whether or not the money has been collected or disbursed.
Clear the Air in Alvin, Texas, uses the accrual method for tracking its finances.
“We feel that it provides the best information for financial reports and ultimately allows us to make better, more informed business decisions,” said Britany Baimbridge, accounting associate at Clear the Air. “We have very advanced accounting practices, which we have developed over time, always striving for better, more accurate data. Most key business decisions are based on the information presented in financial reports, and accounting standards reflect that.”
Income and expenses are also discussed in the training as it explores the benefits of accurately keeping the books. Not only does accurate bookkeeping assist in the effective pricing of products and services, but it also lets a business owner know if the company is making or losing money.
Much of this information is collected and can be examined in a monthly balance sheet. The training describes this financial tool as a snapshot of a business. It highlights current assets — cash or other items that can be converted into cash within one year; fixed assets — property and equipment owned by the business not normally intended for sale; liabilities — the company’s debts or financial obligations; and equity — the part of the assets that the owner or owners have claims to after all the liabilities are paid.
“I would strongly encourage every small business contractor to produce and review an accurate profit and loss statement each month,” said Baimbridge. “Understanding how much money it takes to complete jobs sold, overhead business expenses, and how much money you kept at the end of the day is key in determining what, if any changes need to be made.”
PUT SOMEONE IN CHARGE
Be it a bookkeeper or an accountant, someone needs to be in charge of managing the financial paperwork of a business. A missed opportunity for contractors can be the inability to delegate financial tasks. Contractors are busy working in the business during the day and spend their nights working through business paperwork. It can be exhausting and sets contractors up for burn out and failure.
Although likely easier said than done, putting someone else in charge allows contractors the ability to watch the business and lead it from a higher vantage point. The key is to choose a trusted and qualified candidate.
“When hiring an accountant, every business should look at the education, reviews, services beyond accounting, background, and technology experience,” said Cristal Villasenor, president of Elite Financial Co. Inc., Napa, California. “Ask a lot of questions about their background, the clients they have helped, their overall experience with the HVAC industry, and how specifically they can help the business. If someone doesn’t have the background and just calls themselves an accountant, this can get business owners in trouble.”
Contractors should be looking for a person or firm that is detail oriented, has integrity, is passionate for the business, and shows a willingness to do what is needed while challenging the status quo, according to Scott Miller, controller for Classic Air’s One Hour Heating and Air Conditioning, Virginia Beach, Virginia.
“Small business accountants are often the first ones to see what needs to be done because they are involved in everything,” he said. “If the owners are out running calls or generating new business, they may have to rely on the accountant to manage everything else on the administrative side.”
SPEND SOME TIME, MONEY
It’s not ideal to show up to any appointment without preparation, and accounting appointments are no different. Contractors need to be prepared to spend time and money as they inform another person of their business dealings and goals. Principals Martin and Julie Lepper of Lepper & Company LLC in Ann Arbor, Michigan, place a high value on spending time with their accounting clients.
“When setting up a new customer, we take the time to learn about them and their business,” Julie Lepper said. “We want to know what is working and what is not working in their current model, and how we can best help them succeed at accomplishing their goals. What systems, tools, and procedures do they have in place to support efficient operational activities?”
The company believes that if they aren’t taking time and asking a lot of detailed questions, then they aren’t performing their due diligence.
“In health care, it is a generally held belief that, ‘prescription without diagnosis is malpractice,’ ” said Martin. “The same holds true for the kind of work that is done by professional accountants.”
Both Martin and Julie Lepper have strong beliefs about the price that contractors pay to hire an accountant. Although it can be somewhat costly, hiring professional accounting services can help prevent expensive mistakes that can cause a company to fail.
Martin Lepper quoted Red Adair when he said, “If you think hiring professionals is expensive, try hiring amateurs.”
Running a business with pen, paper, and a calculator works, but so did riding into town in a horse and buggy. Those tools, though exemplary in their time, are a part of history. Financial software is now an everyday business tool, just as cars are now the horsepower of the transportation industry.
“Every business, even a small business, needs to have business and accounting software,” said Miller. “It enables the owner and any other key employees to run reports and drill down to the details if need be. There are a lot of off-the-shelf packages that are perfect for small business and that offer technical support for a reasonable fee.”
The point of the software is to not only assist businesses in keeping and creating accurate records, but to also help businesses with state and federal tax and business law compliance.
“I highly recommend using software for accounting, especially in this day and age where it is at everyone’s fingertips,” noted Villasenor. “It can help a business owner stay organized, get reports fast, get a list of transactions, and stay in compliance.”
The Leppers have experience with small HVACR clients who are just beginning.
“In every one of those cases, the need to use accounting software quickly emerged as their business grew,” said Julie Lepper. “We recommend that if HVACR businesses are not using accounting software, that they prioritize doing so as soon as possible.”
STOP THROWING THINGS OUT
Gum wrappers and pocket lint are safe to pitch, but when it comes to receipts, bills, and financial documents, it is important to stop throwing them in the trash.
“Keep every receipt, and document everything,” said Martin. “The more detail and information provided to the person keeping the accounts, the better off a company will be.”
This rings especially true when it comes time for end-of-year analysis or if an audit is required for any reason.
“If a contractor is not able to hire a professional, they need to keep their records organized,” Villasenor said. “The worst thing someone can do is throw away receipts and be unorganized.”
Publication date: 12/3/2018