Canadian Contractor - July-August 2015

FINANCIALS
Let’s take a moment to differentiate between Net Profit
and Cash Flow. They are not the same thing. Contractors
often show a profit on their Profit and Loss statement, but
they don’t have any money in the bank. That’s because
the timing of payments received and payments going out
doesn’t always coincide. For example, you may have to
meet your payroll obligations before you get paid by the
customer. You may also have to pay deposits or pay COD
for materials before you get paid. Both of these examples
will result in negative cash flow even though you show a
profit.
Let’s look at each of these three areas in more detail.
Month 1 Month 2 Month 3 Total
Revenue $50,000 $60,000 $50,000 $160,000
Cost of Goods Sold $35,000 $42,000 $35,000 $112,000
Gross Profit $15,000 $18,000 $15,000 $48,000
Gross Profit % 30% 30% 30% 30%
Overhead Expenses $8,000 $8,000 $8,000 $24,000
Net Profit $7,000 $10,000 $7,000 $24,000
How much will your company produce?
Although you might not be able to know exactly how
much work your team will do every day, you can take a
look at your project management schedule at a high level.
It should tell you what the planned timelines are for all
your projects. By knowing the timelines of your projects,
you can calculate the overall value of that work. This will
give you your target revenue for the next 90 days.
Even if you are not using a project management system
you need to be able to estimate how much work or how
many projects you plan to do over the next 90 days. This
target now needs to drive your production. Taking control
over the amount of work that your crews and subs deliver
is a critical part of your success. Without a target and
some control you will severely reduce your likelihood of
success. The other major benefit of knowing how much to
expect your company to produce over the next 90 days will
help you better manage your cash flow. You need to make
sure that the customer’s payment schedule is set up so
that you don’t finance their project.
Calculating the cost of the work performed
If you know how much work you are expecting your crews
and your subs to produce, then you should be able to
calculate how much it will cost you to do that work – Cost
of Goods Sold (COGS). The timing of when a sub will send
you the invoice is not the critical point here. The critical
point is to be able to review the estimates you produced
before you won the project, to get the costs that you
allocated to that work.
The common point between how much will you
produce and how much will it cost you to perform the work
is that you must have a plan of what work you are going
ILLUSTRATION: GLENN M C EVOY
www.canadiancontractor.ca July/August 2015 19