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 operations. 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 business. 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.
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