Financial Management Guide

Get on accrual, whatever your tax filing says

Cash-basis books tell you what happened to your bank account, not what happened to your business. In a trades business those two things are routinely a month or more apart: you buy material in March, do the job in April, and get paid in May. Read on cash basis, and March looks like a disaster and May looks like a triumph, when in fact April was the month that mattered.

You can file taxes on cash basis and still run the company on accrual — most do. Ask your accountant for accrual-basis management statements monthly. If they resist, the resistance is usually about their workload rather than your interests.

Key point. File on cash if it suits your taxes. Manage on accrual, always. Buyers and lenders will only look at accrual anyway.

The five reports, and the cadence

There are only five things you need to look at, and three of them take under ten minutes.

• Weekly — Cash position and 13-week forecast. The single report that prevents the failure mode that actually kills profitable trades businesses: running out of money while growing.
• Weekly — Revenue and gross margin by division. Not total revenue. Revenue split by the lines you manage separately, with margin against each.
• Monthly — Full P&L against budget, accrual basis, closed by the 15th. If the close takes longer than that, the numbers arrive after the month they could have changed.
• Monthly — Balance sheet, with a genuine look at AR ageing and work-in-progress. This is where the surprises live.
• Quarterly — Rolling twelve-month view of margin, overhead ratio and revenue per technician. Trends, not months. Months are noise.

Separate the job costs from everything else

The single most common bookkeeping defect in a trades business is a chart of accounts that cannot tell you gross margin, because job costs and overhead are mixed in the same buckets. Field labor sits in the same payroll line as the office. Truck fuel sits with rent.

The test is simple: can you answer 'what did it cost us to deliver the work we sold last month?' without opening a spreadsheet? If not, the chart of accounts needs restructuring before any of the analysis in this Learning Center will produce reliable answers.

The rule is: if the cost only exists because the job existed, it is cost of delivery. Field labor and its burden, materials, subcontractors, equipment rental, permits, and the fuel to get there. Everything else — the building, the office team, insurance, software, the owner — is overhead. Marketing sits on its own line, because it behaves like neither.

Key point. If a cost only happens because a job happened, it is cost of delivery. Everything else is overhead. Marketing gets its own line.

Burden your labor properly

A technician who earns $30 an hour does not cost you $30 an hour. Payroll taxes, workers' compensation, health insurance, paid time off, vehicle, phone, tools and training routinely add 35% to 55% on top. If your job costing uses the base wage, every job looks more profitable than it is — and the shortfall shows up as an unexplained gap between gross margin and net.

Calculate the burden rate once a year, apply it to every job, and re-check it whenever your insurance renews.

When the reports disagree

Gross margin looks fine, net margin is thin. This is an overhead problem, not a pricing problem — check overhead as a share of revenue against the band for your size before touching prices.

Profitable on paper, no cash in the bank. Look at AR ageing and work-in-progress. You are financing your customers, and the fix is collections discipline, not more sales.

Revenue up, profit flat. Almost always mix: the growth is in low-margin work. Split revenue and margin by division and the culprit is usually visible in one line.

Good months and bad months with no pattern. Usually a close problem rather than a business problem — costs are landing in the wrong month.

What good looks like

A trades business with its finance function in order can, within one working day, produce: three years of accrual statements, a current AR ageing, a job-costed margin report by division, and a list of every add-back with an explanation. That is also, not coincidentally, the first document request in any acquisition process.

Businesses that can produce that pack sell faster and for more. Businesses that cannot spend the first sixty days of a deal building it under time pressure, with a buyer watching, which is the worst possible circumstance in which to discover your books do not tie out.