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For the Mechanical/Plumbing Contractor Cash Flow is Key
This Article Will Focus On strategies to increase cash flow and profits by understanding and applying the principle of MR>MC, where MR = Marginal Revenue and MC = Marginal Cost.
Every Day You Are – Presented With opportunities to invest your Plumbing and Mechanical Company’s hard earned money. Apply the strategy of MR>MC so that it will generate the most cash flow and bottom line profits.
Opportunities Such As – Tools, equipment, trucks, vans, cars vehicles, software, outsourcing your Plumbing and Mechanical Company’s bookkeeping and accounting services, real estate anything you could use in your business that has the potential to increase revenue or reduce expenses.
Knowing Which Opportunities
To Pursue Is Priceless
Very Few Opportunities – Are worth pursuing and most of them are not. The answer is having a fast and easy system to help you separate the priceless few from the worthless many.
First And Foremost DO NOT TRUST YOUR GUT – It may sound counter-intuitive because it is. Especially since most successful Plumbing and Mechanical Contractors trust their gut for so many decisions.
When It Comes To MR>MC – Your gut can lead you down the primrose path of mediocrity or complete destruction depending on how large the amount of money is at stake. The reason is simple there are far too many variables to consider and here are seven of them to get you started:
- Do you know your Plumbing and Mechanical Company’s current hurdle rate?
- Is it a one-time investment?
- Is it a large purchase with a down payment and subsequent monthly payments?
- Does it require monthly or annual maintenance contracts?
- Have you completed a thorough review of the present value calculation scenarios?
- Have you calculated your Internal Rate of Return (IIR)?
- Have you considered discounted cash flows?
- Is the payback in terms of years and the Return On Investment (ROI) high enough?
- What are the hidden costs and benefits and do the offset each other or is there a delta?
Complex Decision Modeling – And statistical analysis using the scenarios built into Excel is one of the best tools available; however, for a construction company with annual revenues under $5,000,000 it could be overkill, similar to hunting house flies with a 16 pound sledge hammer.
We Have Simple – Tools to help our clients make intelligent informed decisions on which opportunities to accept and which ones to reject.
For Any Opportunity Give Us Six Pieces Of Information:
- The initial investment of the tool, equipment, service or item?
- If it is financed what are the payment terms?
- The monthly or yearly maintenance cost if any?
- How long do you expect the tool, equipment, service or item will last?
- How much time will save in a week or month?
- The hourly base pay of the person that will benefit from the item?
From That Information – You provide and pulling some reports from your Properly Setup QuickBooks file we can generate a simple analysis that you can use to make an intelligent informed decision.
Can Dual Monitors Add $3,508.80
To Your Bottom Line Profit?
- An in-house bookkeeper with one 19″ computer monitor
- The tiny numbers are hard to see and causes eye strain
- The bookkeeper wastes 30 minutes a day due to poor equipment
- Every year your Plumbing and Mechanical Company loses $821.79 in bottom line profits and cash flow!
Let’s Run The Numbers For A Part-Time Bookkeeper Per Month
Step #1 Direct Cost Per Month:
Hourly Pay Rate = $15.00 X 10 Hours A Week X 4.34* Weeks = $651.00
*52 Weeks Per Calendar Year / 12 Months = 4.34
Health Insurance Premium = $0.00
Payroll Tax, FICA = $40.36 + Medicare = $9.44 + Workers Comp $6.51 = $65.75
Overhead For Office Space + Computer + Office Supplies + Utilities + Misc. = $100.00
Hourly Rate You Charge Your Customers : $75.00 X 2 Hours For Training = $150.00
Cost of Chaos, Overpaid Bills, Lost And Unbilled Invoices and Other Costs = $100.00
Total Direct Cost Per Month = $1,066.75
Step #2 Indirect Costs Per Month:
Retirement / 401k / Benefits = $0.00
Vacation and Holiday Pay = $0.00
Hours of Paid Time To Attend Continuing Education = $0.00
Cost of Continuing Education Seminars, Tutoring, Manuals = $0.00
Cost For Accountant To Find And Fix Errors In QuickBooks = $28.98
Total Indirect Cost Per Month = $28.98
Step #3 Total Cost Per Month:
Total Cost Per Month = $1,095.73
Step #4 Cost Of Unproductive Office Labor:
Start With Cost Per Month = $1,095.73
Find The Cost Per Minute = $0.11
30 Minutes Waste Per Day X 20.7523 Days Per Month X $0.11 Cost Per Month = $68.48
Total Waste Cost Per Year = $821.76
Step #4 Will An Investment In Dual 27” DVI Monitors Pass The Test MR>MC?
Dual 27″ DVI monitors for an estimated cost of $300.00 each X 2 = $600.00
Year 01 new profit and cash flow is $821.76 – $600.00 = $221.76
Total added bottom line profit and cash flow over five years* = $3,508.80
*Year 01 = $221.76 + Four Years X $821.76 Each = $3,508.80
Increase Sales Or Reduce Costs – The two main drivers of profit. Best practices of successful Plumbing And Mechanical Construction Companies show they do both. The key is to spend the time and effort to complete a thorough analysis for each opportunity.
The Example Shown Above – Should take about fifteen minutes if your QuickBooks is properly setup and maintained so that it generates accurate useful reports.
If Your QuickBooks – Is not generating accurate reports contact us immediately because most business failures can be traced back to a lack of Key Performance Reports and bad bookkeeping.
Why Some Contractors
Earn Extremely High Profits!
Success Is A Few Simple Disciplines Practiced Every Day – The construction companies that make a lot of money regardless of the economy, competition or any other external distraction are the ones that practice C.A.N.E.I. Continuous Never Ending Improvement.
What Would Your Plumbing and Mechanical Company’s – Cash flow and bottom line profit would look like at the end of the first, second and third year if you made one minor improvement every week?
This Is One More Example of how Fast Easy Accounting is helping construction company owners just like you 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 people like you and me so stop missing out! Call Sharie 206-361-3950 or email@example.com and schedule your no charge one-hour consultation
Profitable Contractors and Construction Company owners have known about the value of outsourced bookkeeping services and contractor coaching services like ours for a long time and now you know about it too!
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We Serve Contractors All Across The U.S.A. Including Alaska And Hawaii
Thinking About Outsourcing Your Contractor Bookkeeping Services?
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About The Author:
Randal DeHart, PMP, QPA is the co-founder of Business Consulting And Accounting in Lynnwood Washington, www.FastEasyAccounting.Com He is the leading expert in outsourced construction bookkeeping and accounting services for small construction companies across the USA. He is experienced as a Plumbing Contractor, General Contractor, Project Management Professional, Construction Accountant, Intuit ProAdvisor, QuickBooks For Contractors Expert and Xero Contractor Accounting Specialist, Bill.Com Guru and Tsheets ProAdvisor. Check out our podcast http://www.fasteasyaccounting.com/contractors-success-map-podcast/ and Follow Randal on Google+
I leave you with this heartfelt blessing – “Your best days are ahead of you and you will accomplish greater things than you ever dreamed of doing.”
Randal L. DeHart, PMP, QPA