Basic Financial Terms Concepts COGS Cost of Goods Sold These by ramhood16

VIEWS: 1,308 PAGES: 3

									                     Basic Financial Terms/Concepts

   COGS = Cost of Goods Sold

These are the costs that are directly associated with sales of Time & Materials and
Contracted jobs. These costs include Direct Labor, Direct Materials, Labor Burden,
Subcontractors, and other Direct costs. By accurately stating these costs you will benefit
by attaining a true gross profit which is critical to determining your profitability per job
or for the company as a whole.

   Gross Profit % and Gross Profit $

Gross Profit can be summarized in two ways:

Gross Profit dollars are a calculation of Total Income – COGS (Direct expenses).

Gross Profit % is a percentage represented by dividing Gross Profit dollars by the Total
Income dollars. (GP$/Income$)

   Chart of Accounts

The chart of accounts is a list of all the general ledger codes to be used in Quickbooks.
These accounts are broken down into Assets, Liabilities, Equity, Revenue and Expense
accounts. Using the proper general ledger code from within the chart of accounts will
ensure the accurate reporting of revenue, expenses, assets, etc..

   Labor Burden

Labor Burden is the additional costs that are associated with Direct Labor such as payroll
taxes, liability insurance, health insurance and other costs. These costs must be included
as part of the Cost of Goods Sold to properly reflect the Gross Profit. The Profit and Loss
statement must allocate these expenses out of the general and administrative costs and put
them into Cost of Goods Sold. Each franchise partner will likely have a slightly different
labor burden but on the average it should run approximately 40%. Similar to Gross Profit
the Labor Burden is also expressed as a %. The percentage is calculated by dividing the
Labor Burden by the Direct Labor costs.

   POC or Percentage of Completion

Percentage of Completion is an accounting concept used to properly recognize revenue in
the construction industry. The concept is very simple on the surface but typically involves
some analytical work to determine what is the amount of revenue earned on each project.
Since all monies are recorded as income when received, we need to go through the
projects at month end and determine what is the true amount of revenue that has been
earned on each one. By determining the true percentage of completion on each project
this will be used to help formulate the actual revenue that should be recognized for any
given month.

   Accrual vs. Cash Accounting

These two methods while similar in some respects have two distinctive concepts to
remember. Cash Accounting records cash as revenue when it is received regardless of
when it is earned. Therefore a (POC) Percentage of Completion by project must be
determined to calculate actual earned revenue. Accrual accounting uses the concept of
matching revenue against expenses during the months earned or incurred. This concept
more accurately reflects your profitability at any given point. Another note to remember
is that entering expenses into the accounting system as they occur will better match
expenses with revenue as it is earned.

   Journal Entries

Journal Entries allow the bookkeeper to increase or decrease account balances. The
QuickBooks feature allowing the user to make journal entries is typically used when
QuickBooks does not have another user interface to enter necessary accounting data. For
example journal entries are required for percentage of completion adjustments and
depreciation of assets.

   Variance Analysis

Variance Analysis is a process to help you determine where you could be “bleeding
resources” or earning unplanned income. This approach compares the actual revenue and
expense lines on the profit and loss statement to the budgeted profit and loss statement.
Quickbooks offers many ways to view this information which will help make the
variance analysis quite painless. By reviewing large fluctuations this will help find errors
in your reporting process and/or point out obvious strengths and weaknesses in your

       Balance Sheet vs. Profit and Loss Statements

The Balance Sheet and Profit & Loss Statement are two of your most important financial
documents that will help you see the financial results of your operation. As it is called the
Profit and Loss Statement (P&L) shows the profits and losses of the company. This is
stated by listing the revenue reported for a given period and expenses incurred to operate
the business. Net income is the bottom line on the Profit and Loss Statement, if the Net
income shows a (negative) amount then there was a net loss for the period. The Balance
Sheet is used to track all of the Assets, Liabilities, and Equity of the company. It is
important that as items are purchased and revenue is received that each of these items is
coded to their proper place or this could distort both statements.

       Direct vs. Indirect Labor

Direct Labor is the labor hours (payroll expense) that can be allocated to specific jobs.
Properly allocating direct labor to specific projects will help you determine true
profitability per project. Indirect Labor is the labor hours (payroll expense) that is not
associated to a specific project. For example, drive time, training, marketing efforts,
vacation and sick time are all examples if Indirect Labor.

      Cash Management

The term Cash Management is not simply defined; it consists of a series of actions and
understandings of cash flow management within your company. Included in Cash
Management is the timely reconciliation of the cash account to the bank statement,
making timely bank deposits, monitoring payments of bills, and borrowing against credit
lines to cover anticipated shortages. Cash Management also involves the understanding
and review of the Bank Account Register that can be easily generated in QuickBooks.
Cash Management is a critical tool to use and understand to successfully operate your

      Monthly HRS Productivity

Business metric used to plan HRS hiring. Monthly HRS Productivity is calculated as
Income / # of full time equivalent HRS employees working during the month. Income
(calculated using % of completion) is used to get more accurate reflection of work
completed during the month. HRS Productivity is affected by the amount of materials
and subcontractors since they increase income but don’t necessarily increase the number
of HRS employees. We would expect higher HRS Productivity on larger jobs where
materials and subcontractors are a larger part of the job. Since the mark ups on
subcontractors and material are lower than HRS labor we would expect GP to be lower
relative to higher HRS Productivity numbers.

To top