FINANCIAL MANAGEMENT - ACCOUNTING

This is the 38th of a series of newsletters published on Business Management and Management Skills. Not all topics will apply to your business, but each section will be beneficial to establish company goals and objectives. By reading and studying these newsletter articles, you’re taking the first step in achieving your goals.

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The financial picture of your organization is very important but, as a business owner, you probably don’t have the time to devote to the daily maintenance of the financial records of your firm. It’s in your best interest to hire a bookkeeper to handle these duties, as well as an accountant who can prepare the necessary financial statements, maintain tax records, etc.

The financial health of a business is reflected in a series of accounting papers called financial statements. While there are many types of financial statements, such as the balance sheet and the income statement, we’ll focus our attention on the income statement.

A financial statement should be prepared on a monthly basis by a qualified accountant using generally accepted accounting principals (GAP). Studying financial statements enables the manager to understand the current financial health of the business, and make necessary adjustments on a timely basis. The statement represents a financial record of what is happening to the business, and enables the manager to assign someone to handle problems that are discovered before they become detrimental to the company.

A financial budget is a projection of future and desired goals, and a plan for its attainment expressed in dollar amounts. At the beginning of the company’s fiscal (record keeping) year, a budget must be established based on your objectives. As you study the monthly statements (results of operations), you compare them with your budget (plan) to see how close you’re coming to your objectives (goals), and make necessary changes to your budget to reflect the realities of current business conditions. This becomes, in essence, a closed-loop financial control system.

Understanding cost is an important area in business. Overhead is basically the costs incurred in doing business, which have not been allocated to a specific job. Estimating, which is an essential part of the contracting and service trades, is dependent on the accuracy of the overhead shown in the financial statement. Estimates must include the cost of direct labor and required materials, and other costs (such as taxes, licenses, bonding, etc.) as well as overhead burdens and profit (the cost exposure to the risk of doing business).

Fixed overhead remains relatively constant from one financial statement to the next unless there is a radical change in the size of your business. If you add one or two more employees, you’ll probably occupy the same facilities and pay the same fees, such as licenses, utilities, etc. The total increase in overhead will vary only slightly and the cost of overhead per field employee will be reduced. Of course, a large expansion may require moving to a larger more expensive location and adding more office help and equipment, so the fixed overhead can show a substantial increase.

With companies that are primarily in the servicing business, the separation of truck overhead from other fixed overhead items is not as significant. In this type of business, for each employee there is a truck, and the number of trucks is increased or reduced with the change in the number of service personnel. In construction, there is not a constant relationship in the number of employees per truck; therefore, to create a more accurate financial picture, you should allocate your overhead on your estimate in a more practical manner by maintaining fixed truck overhead as a separate item on your financial statement. Certain jobs may not require the use of trucks on locations where you put a trailer in place. Therefore, the cost of the trailer must be included in your job-cost estimate, but you may eliminate the overhead associated with the cost directly related to the trucks.

The item on the statement headed “Owner’s Bonus” or “Owner’s Expenses” is a catchall for owner’s expenses paid by the business. Since the owner takes the financial risk, he or she is entitled to a greater share of the profits, part of which are in the form of perks. Take as many deductions here and elsewhere as are legally permissible to reduce your tax burden. In case of sincere doubt that an expense is allowable, follow the recommendations of your CPA or tax attorney.

Mike Holt’s Comment: I would like to extend a special thank you to L.W. Brittian, a Mechanical & Electrical Instructor in Lott, Texas, for reviewing and editing the various articles in these newsletters. His comments and suggestions have been invaluable in the preparation of my Business Management and Management Skills’ Workbook. This newsletter article was extracted from that workbook. Watch for our next newsletter, and as always, we invite your comments and feedback. Send us your real-life experiences. We value your opinions and participation. Please respond to Barbara@MikeHolt.com. And… be sure to visit Mike Holt’s Website at http://www.mikeholt.com

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