Last edition of the Buzz we spent some time perfecting a contractor’s P&L statement. This week, let’s go beyond perfection!
We’re going to take the same statement from last month, and do two things to it. First, we’ll add a lot more detail to the chart of accounts. Notice how the “Ultimate P&L” attached breaks out expenditures into various sub headed categories (in bold type), and adds quite a few line items. Don’t be afraid to break out expenses into smaller and smaller increments. The more line items you have, the clearer the picture you get of where your money goes. Even if you don’t currently spend money in certain categories, it’s wise to leave line items open for likely future expenses. It simplifies your accounting, and also serves as a reminder of expenses that could and should be charged to your business.
Next, let’s see what happens if we “goose” the numbers a bit based on the assumption of increased sales on the same amount of expense. How is it possible to get more sales without more expense? Higher prices, of course.
Our new P&L reflects annual sales of $2,989,914. This is a 14.3 percent increase from the $2,614,276 actually reported by this contractor, without adding any capital investment or employees. This boosts gross profits to $1.94 million (65 percent), compared to $1.57 million (60 percent) under the old sales figure.
Overhead dollar expenditure remains static, so overhead as a percentage of sales decreases to 50 percent from 57.6 percent of sales. Net profit thus rises from $60,892 (2.33 percent) to $436,530 (14.6 percent), a more realistic figure, in my opinion. This represents $375,638 additional profit dollars for the company.
How To Spend It: The question now becomes, what could this company do with an extra $375,638 that it couldn’t do with a measly $60,892 of profit? Plenty!
For starters, take note that this company (it is based on a contractor’s actual P&L statement) does not have a retirement plan for either the owner or employees. Total employee compensation, including the owner, amounts to $957,489. Let’s take 22.5 percent of that employee compensation as the contribution to a profit sharing and money purchase pension plan. (This is in line with the percentage at Blau Plumbing & Heating.) This would cost $215,435.
Doesn’t this make more sense than paying income taxes on the full $436,530 of net profit?
After funding the plans, an additional $221,095 of net profit before taxes would be available for other purposes. You could use it to expand with additional trucks, equipment or facilities. You name it.
Sales Math: Of course, many of you reading this will say that it would be suicidal to raise your prices 14 percent, that people would reject the higher price. Will they? Does it really make that much difference if a certain repair or replacement bills out at, say, $543 instead of $475? Not in my experience.
OK, if you are still skeptical, let’s lower our sights. Instead of shooting for a 14 percent increase in selling prices, we’ll opt for a more modest 6.3 percent increase. That widget replacement costing $475 would now cost $505. Instead of $60,892 of net profit dollars, the company would have $217, 748 left over. The company could fund a profit sharing plan amounting to 15 percent of employee compensation (143,623) and still have $74,125 in net profit before taxes left over.
Yes, these are hypothetical numbers. But the reality is lived every day in my company and scores of others just like it run by PHC contractors who know what their services are worth, and how to get it through astute marketing, professionalism and numbers crunching.
The biggest problem faced by our industry is attracting talented young people to it, and we will never be able to do it unless we offer them attractive pay and benefits. I’m showing you how to do it. Don’t tell me it can’t be done.
The Ultimate P&L Statement Revisited