According to the Better Business Bureau 95 percent of all businesses fail within their first five years. According to the California Contractors State License Board most contractors fail due to a lack of business skills. Of all business skills, none is more important than financial management. No, you don’t have to be an accountant. But if you don’t understand how to read a profit and loss statement or a balance sheet your business may be at risk.
An income statement is broken down into five sections:
- Cost of Sale
- Gross Profit
- Profit or Loss
Income is the section of the Profit & Loss Statement where “all money in” is recorded. The total amount all sales is shown in income.
Cost of sale lists project related expenses.
Gross profit is the difference between Cost of Sale and Income.
Overhead lists expense items such as rent, postage, office salaries and other non-job related costs.
Profit or Loss occurs when Overhead is subtracted from Gross Profit.
Basically, the Profit & Loss Statement is nothing more than an income and expense monitor. If you lose money on a project it shows up as increased cost of sale and reduced gross profit. If your overhead is too high it shows up as reduced net profit – or even a loss.
Here are standard income statement percentages to shoot for:
- With income at 100%, cost of sale should not exceed 60%.
- With job cost at 60%, gross profit will be 40%.
- Finally, overhead should not exceed 30%.
Using these percentages will result in a 10% Net profit.
Sales Income 100%
Cost of Sale 60%
Gross Profit 40%
Net Profit 10%
Manage your estimate prices and your overhead expenses so that all of your costs fall within the percentages we’ve outlined. Thus, you will make a reasonable profit based on the risk that you take.