Learning The Financial Nuts and Bolts
"If your business is not working, it is your fault," he told owners. "It all depends on you. You need to stay on top of your business and find ways to improve every day. The hard work starts when you decide to be profitable."
Maynard discussed the importance of knowing the difference between balance sheets and profit & loss (P&L) statements. "All of the games played are done with balance sheets and not with P&L statements," he said.
The Balance SheetsMaynard pointed out that the mathematical equation for a balance sheet is: Assets minus liabilities equals net worth. He noted that net worth gives contractors an idea of what is happening with their company â€“â€“ a history of the company. He also had some words of advice to contractors who fudge on their balance sheets.
"Quit playing games and get your inventory on the balance sheets," Maynard said. "The IRS can come in and wipe you out if you say you have no inventory. Their job is to find money for the government."
Maynard added that financial ratios are a means to measure a company's ability to use current assets to pay current liabilities. The formula is: Current assets divided by current liabilities equals current ratio.
"Your current ratio tells you that for every dollar of current debt, you can pay it off that number of times with your current assets," he said. "Most accountants recommend a 1.5-2 to 1 ratio, which means that for every dollar of current liabilities, the company has $1.50 to $2 of current assets to pay off those debts."
The P&L StatementMaynard noted that the P&L statement is made up of the following categories:
One way Maynard suggested to maintain a healthy P&L statement is to stay on top of accounts receivable. "If you are giving your customers 30 days to pay, you are giving them an automatic 3 percent discount," he said.
"You get 97 cents on every dollar that is 30 days past due. Why not just give your customer a 3 percent discount on prompt payment or charge a billing fee to make up the difference?
"Today's world is payment upon service but yet we still bill our customers. If there is a history of slower payment you can charge customers the percentage it is costing you by adding it to the hourly rate the next time you bill them."
One component of the P&L statement that gets people confused is how to breakdown the "cost of sales."
"This is where a lot of us get into trouble," Maynard said. "People put a lot of unnecessary stuff into the cost of sales instead of into overhead."
Other Cost-Saving TidbitsMaynard asked PHCC contractors if they had their service techs report to the shop each day. Some raised their hand. He said that having service techs come to the shop each morning costs an average of one service call per day. Based on the national average of $325 per service ticket, that equals $81,000/year for each tech.
"We may not necessarily have a lack of service techs, we may have a lack of productive service techs," he said.
He also suggested that contractors look for suppliers who give them the best possible discounts. "Most suppliers will give you a discount," Maynard noted.
"If they don't, they may be subsidizing the poor customers they have. Drop them - or send them a message by using suppliers who discount. Don't subsidize your supplier's slow-paying customers."
Finally, Maynard suggested that contractors charge a reasonable price for their services. He said that customers aren't always looking for the cheapest price but the reason that most small businesses fail is due to the owner not charging enough for his product to cover his costs and make a profit.
"Three percent net profits is something you shouldn't be shooting for," he said. "You need to target 10 percent."
Publication date: 10/24/2005