Mar 18, 2016
Have you been in business as a construction contractor or
specialty contractor for a while and now you are wondering what
your construction company is worth?
This question comes up early and often and perhaps you would like a bit of inside information that we share with our Outsourced Strategic Contractor Accounting Services Clients.
Nothing Is Ever As Good Or As Bad As It First Appears
If you are like most contractors you learned a trade, skill or
craft and after a while you decided to go into business for
yourself and make "The Big Bucks" and that was one of the happiest
day of your life. I've heard It said that boat owners experience
two of the happiest days in their lives; the day the bought their
boat and the day they sold it.
There are two answers to the question what is my construction contracting company worth.
Equity Which Is [Assets or What You Own] (Cash, Tools, Material,
Loans The Company Made) - [Liabilities or What You Owe] Payables,
Credit Card Balances) = [Equity or what is left Over].
These numbers are found on your construction company Balance Sheet. See the example below and notice the highlighted line "Total Equity"
This means as far as the accounting records are concerned:
#1 If the owner collected all of the money owed to them
[Accounts Receivable] and got the security deposit back.
#2 Sold all of the vehicles, computers, office equipment, machinery and equipment [Fixed Assets] for the amount shown.
#3 Paid all of the bills [Accounts Payable], [Credit Cards], [Other Current Liabilities], [Long Term Liabilities].
#4 There would be $305,616.56 in cash for the owner.
The true net worth of your construction contracting company is what someone else will pay you for it. There are 100's of factors that affect how much your construction company is worth and I have listed nine of them below:
1. Length Of Time In Business
2. Standard Financial Statements
3. Net Income
4. Cash Flow
5. Number Of Customers Or Clients
6. New Customer Or Client Acquisition Strategy
7. Existing Customer Or Client Retention Strategy
8. Documented Operations Manuals
9. Unique Selling Proposition
#1 Length of Time In
Business - In general the longer your business has
been around the better. Just know that everything changes rapidly
so in most cases what occurred more than three years ago may not be
#2 Standard Financial Statements - There are number of ways to setup QuickBooks for Contractors it depends on what you want from them.
Internal Financial Statements are what most bookkeeper’s setup which means they may add a lot of fluff and try to capture Work-In-Process (WIP) and Job Costing in the Chart of Accounts which is fine for your internal use but next to worthless for anyone outside your company.
Tax Preparer Financial Statements are what most C.P.A.'s and Tax Preparers setup which means they keep the Chart of Accounts small as possible and mirror the annual tax return as close as possible. This helps them get the tax return done in the least amount of time and effort possible. It is next to worthless for you, the contractor and anyone else.
Standard Financial Statements are what most bankers and investors like to see because the Chart of Accounts are setup in a way that makes it possible for them to understand the financial health and well-being of your Construction Company.
Most banks subscribe to a service like The Risk Management Association (RMA) that allows them to input key data from your Financial Statements and returns a very in-depth analysis of your construction company. This means when a contractor gives their banker, investor or potential buyer anything but Standard Financial Statements they are "Shooting Themselves In The Foot With A Nail Gun".
Our Contractor Bookkeeping System can provide you with Standard Financial Statements; unless you or your bookkeeper makes adjustments in the Chart of Accounts. You and your bookkeeper can make any adjustments in the Item lists and as long as they are linked to the correct account in the Chart of Accounts it will be O.K.
A Bit Of History Helps With Understanding How RMA Can Affect You Personally
The Robert Morris Club (RMA) was formed to help businesses and bankers exchange credit information. The RMA developed several tools among them was a system of Ratios that most lenders, creditors and all credit card companies use to separate the good companies from the bad in all industries.
The RMA and other reports show where your contracting company stands in relation to other contracting companies serving similar geographic and demographic markets. Each major category, Sales, Cost of Goods Sold, Overhead, Other Expenses and Other Income are rated on a scale of top 25%, middle 50% and bottom 25%.
Ideally all of the numbers on your Profit & Loss and Balance Sheet falls somewhere in the middle 50%. Whenever a contractor "forgets" to declare all of their income or "overstate their expenses" it will show up here like a red flag.
Finally, a Z-Score
(click here for explanation) is compiled which is a formula for
predicting bankruptcy. Edward I. Altman published it in 1968. The
formula may be used to predict the probability that a firm will go
into bankruptcy within two years. Although not 100% accurate it is
a useful tool, similar to a tape measure is not 100% accurate yet
You apply for a loan, line of credit, bond, credit card or something similar and the lender asks for a copy of your Construction Company Profit & Loss and Balance Sheet. The lender or bonding agent logs into their RMA account and fills out electronic forms, answers questions about your construction company and inputs specific numbers taken directly from your construction company Profit & Loss and Balance Sheet.
Any construction accountant worth his or her salt knows exactly how to setup QuickBooks correctly for your application to be presented in the most favorable light.
If a contractor gives the banker, lender or bonding agent a
set of financial reports that do not conform to the RMA
requirements they may or may not try to extrapolate the numbers
they need. In most cases, they will give you the "Thank you for
applying" speech before giving you the "We will let you know as
soon as we know anything" speech.
The rotten shame is most of the time the lender knows the contractor and believes you are a good and decent person who is a valuable client and they know you will pay the loan back, on time, with all of the interest. The problem is most decisions are made based on software and the loan officer cannot violate the lenders policies.
This is why sometimes a contractor with excellent credit cannot
get a loan or line of credit and yet another contractor with only
good credit can get financing at low interest rates, with low down
payments and a long time to pay it back.
#3 Net Income - Is your construction company earning enough money to pay you a decent salary which should be at least twice your highest paid employee and at least 10% net profit after all costs including Income Taxes.
#4 Cash Flow - Is there enough cash in the bank or money market accounts to keep your company running for at least 60 days? And is your cash balance growing every year by at least 5%?
#5 Number of Customers or
Clients - Which do you have Customers or Clients
click here to learn more? Quantity is not as important as quality.
Having the right mix of quality customers or clients that provide a
lot of top line sales and revenue is critical.
#6 New Customer or Client Acquisition Strategy - A simple documented strategy outlining a profile of your best customer demographics and psychographics so you know who they are, where they are and how to attract them.
#7 Existing Customer or Client Retention Strategy - A simple documented strategy outlining the changing needs of your customers and clients based upon the profile of your best customer demographics and psychographics so you know what they are going to want before they do and continually innovate your services to those wants, wishes and desires.
#8 Documented Operations
Manuals - Don't get trapped by the lazy way of
training people by paying people to learn by experience or by
sitting around the "Camp Fire", "Water Cooler", "Break-Room", or
"Jobsite". In the end you will have total chaos because everybody
will have a different way of doing everything and not amount of
yelling, screaming, threats, punishment will be effective. In the
end you will waste a lot of money that should have gone to bottom
line profits. This can be avoided with documented operations
#9 Unique Selling Proposition - What is the one thing you do best that makes you the most money is your Unique Selling Proposition. One of our Plumbing companies in the 1990's it was maintenance contracts for fast food restaurants. We made a lot of money by cleaning their drains and side sewers during their slow times instead of waiting until it was an emergency and fixing and replacing leaking faucets because we could schedule the work to be done by our crews during our slow time.
These nine tips are only a fraction of what we have to offer and I want to close with a story:
The Bad Area
- Is where contractors without a Clear Business
Strategy operate their Construction Company. Inside the rapids
which are shallow, narrow, with boulders, trees and wrecked
Construction Companies. It’s loud, rushing, churning like a Wild
Roller Coaster with its violent ways which will exact a toll
on even the strongest most determined contractor. In time it
will wear them down to where they are dispirited and
heartbroken or simply heart stopped and flat broke.
The Good Area - Is deep and wide with a sandy bottom and meanders quietly and calmly. It is like riding a Peaceful Merry-Go-Round and those Construction Company owners can become wealthy.
This Is Frank’s* Story - It started one day when the idea of owning his own Construction Company popped into Frank's head, grabbed his attention and said “Let’s do this!”
That Particular Friday - In December the boss had just told Frank that he needed to increase his production. The very idea that his boss would suggest such a thing made Frank's blood pressure go up and Frank was angry about it all day!
The Following Day - Frank's close friend Bob stopped by Frank’s house to visit and Frank mentioned the boss’s remarks. Bob had been encouraging Frank start a Construction Company for years and before you know it Frank The Hot Dog Remodeler, Inc.** was born.
With A Box Full Of Enthusiasm - And a pocket full of "Can-Do-Attitude" Frank launched his brand spanking new Construction Company into what looked like the Good Area of The River of Commerce. For a while everything went well. No boss breathing down his neck, no pesky customers to satisfy, no employees with unreasonable demands, no taxes due, nobody gives Frank any guff. He was a free man and life was good!
Then It happened - Frank’s phone rang and it was Bob calling to suggest that perhaps Frank could come to his house and build a deck on the back side of his two story house.
And So It Began - Frank had his first customer, the one who would help launch him on his journey down the river.
Bob Said - "Hey Frank since you don't have any overhead you could do the job at a really, really low price. And in return I will have lots of parties to show off my new deck to all my friends and neighbors which will send lots of business to you!"
Frank Spent Time Drawing Blueprints - For the new deck. Bob suggested another cost saving idea that he, Bob could pay for the material using Frank's discount at the local lumber yard.
Frank Got The Building Permit - And the work started. Two weeks later it was finished and it looked great!
Frank Was Embarrassed - To ask for money for his labor so he asked Bob to suggest a dollar amount. Bob said since Frank was working for $20.00 an hour at his previous job that would be a fair price. Especially since Frank would get the entire $20.00 and no taxes taken out…what a deal!
A Short While Later - Frank started getting lots of work at $20.00 an hour because he was a nice guy and didn't mark up the material like his old boss, the greedy no-good Remodel Contractor.
Frank Was Generous - Because he provided the little bits of hardware like a few nails, screws, caulk, glue, tape, shims, wire-nuts, bolts, nuts and washers at no charge.
Frank Was Just Entering - The white water rapids in the Bad Area of The River Of Construction Commerce and didn't even know it!
Frank Needed - To bring in other trade contractors like plumbers and electricians to do things he was not skilled or licensed to do.
Customers Told Frank - It was unfair for him to expect to be paid his $20.00 an hour for the time he spent calling trade contractors, scheduling jobsite visits to review the scope of work, gathering bids, reviewing them with the customer, scheduling the trade contractors and overseeing their work. The customers told Frank he wasn't doing any real work; it was a mini-vacation from swinging a hammer; they said with a grin and a smile.
Then Frank Figured Out - His truck was part of the $20.00 an hour he was charging and that it cost money to buy fuel, oil changes, tires, tune-ups and other maintenance and that it needed to be replaced because it was in bad shape.
Frank Suddenly Realized - His $20.00 an hour was paying for his truck expenses, cell phone, hand tools, equipment, maintenance, repairs, small supplies like a few nails, screws, caulk, glue, tape, shims, wire-nuts, bolts, nuts and washers and his time to schedule trade contractors. All those things that seemed unfair when his old boss charged his customers for them began to make sense in Frank's Mind and he began to understand why he needed a Business Strategy.
The River Was Getting - Rough, loud and mean and the white caps were tossing his little Construction Company around like a rag doll caught in the mouth of an angry dog that had not been feed in three days!
In Order To Make Money - And keep his Construction Company afloat he decided to hire some skilled labor and that is when he was just rounding the corner to the bad part of rapids on the river of construction commerce.
Frank Found Out - Real fast that skilled construction workers don't work for less than $20.00 an hour plus benefits, vacation, retirement, health insurance, bonuses and everything else he used to ask his boss for back in the bad old days of being an employee.
Things Had To Change Fast - So Frank raised his rates and lost all of his price conscious customers. Now Frank was in trouble and going over one of the many waterfalls in bad part of The River Of Construction Commerce.
Fortunately Frank - Had a friend who was a trade contractor and referred him to someone who he knows, likes and trusts; The Contractors Accountant and Construction Business Coach who can help him develop his personalized Business Strategy.
Randal Tossed A Lifeline - By offering Frank at No charge a one-hour consultation which he immediately grabbed and held onto it for dear life.
Frank Became A
client - And in time he changed how
he saw the world and understood there is a Hall of Justice but
there is no Hall of Fairness. And that it is up to every
contractor to put as much thought and planning into their
Business Strategy as they do into developing a set of drawings
for a construction project if they want to have something more than
owning a job that nobody wants to buy when they are ready to
Frank's Construction Company Coach - Helped him understand he had to choose between being RICH or RIGHT. Frank chose RICH and as a result his construction company **Frank The Hot Dog Remodeler, Inc. made him a very wealthy man.
*Frank is not the contractors real name; it was changed to protect his privacy.
**Frank The Hot Dog Remodeler, Inc. was used to protect the identity of the firm.
I trust this podcast helps you understand that outsourcing your contractors bookkeeping services to us is about more than just “doing the bookkeeping”; it is about taking holistic approach to your entire construction company and helping support you as a contractor and as a person.
We understand the good, bad and the ugly about owning and operating construction companies because we have had several of them and we sincerely care about you and your construction company!
That is all I have for now and if you have listened this far please do me the honor of commenting and rating podcast www.FastEasyAccounting.com/podcast Tell me what you liked, did not like, tell it as you see it because your feedback is crucial and I thank you in advance.
I trust this will be of value to you and your feedback is always welcome at www.FastEasyAccounting.com/podcast
This is one more example of how Fast Easy Accounting is helping construction company owners across the USA including Alaska and Hawaii put more money in the bank to operate and grow your construction company. Construction accounting is not rocket science; it is a lot harder than that and a lot more valuable to construction contractors like you so stop missing out and call Sharie 206-361-3950 or email firstname.lastname@example.org
Thinking About Outsourcing Your Contractors Bookkeeping Services?
Click On The Link Below:
This guide will help you learn what to look for in outsourced construction accounting.
Need Help Now?
Call Sharie 206-361-3950
Thank you very much and I hope you understand we really do care
about you and all contractors regardless of whether or not you ever
hire our services.
Bye for now until our next episode here on the Contractors Success MAP Podcast.
Randal DeHart | Contractors Accountant