Business Success by the Numbers (Part 2)
by Kevin Lister

In my previous article, "Business Success by the Numbers (Part 1)," I talked about the numbers in your profit and loss statement that provide a picture of your business' financial status.

Here in Part 2, I will discuss the second group of numbers you want to review regularly - your checking account balance, accounts receivable (A/R), accounts payable (A/P) and your break-even amount. These numbers can be found on your balance sheet or derived from figures on both your income statement and balance sheet.
 

Checking Account

The first asset you should constantly look at on your balance sheet is your checking account balance. You should always know exactly how much cash you have on hand, as it will allow you to make sound cash-related decisions both now and in the future.
 

A/R

The other asset to keep your eye on is your Accounts Receivable. Your A/R is the amount of money that is owed to you. As a contractor, these accounts should never include residential customers who are over 30 days due. If they do, you need to contact these customers immediately and collect on these overdue accounts. As for your commercial customers, you should do your best to keep them within 30-45 days.

A/P

On the liability side, you should regularly look at your Accounts Payable. Your goal is to pay your bills within 30 days. If cash flow allows, make your payments early to receive early payment discounts. However, please keep in mind that - in general - your payables should be in step with your receivables. If you are receiving payments in 30 days, then you should be paying your bills in 30 days. This balanced approach will prevent a cash crunch.

Break-even Point

Your break-even point is the amount of sales you need to make in order to pay all your bills and leave your company in the black (although without profit). Your break-even can be calculated weekly, monthly or yearly.

To determine your break-even amount, divide your overhead dollars by your gross profit margin. For example, if your monthly overhead is $21,000 (be sure to include any owner's draws as well as vehicle and loan payments) and your gross margin is 30%, then your monthly break-even revenue is $70,000 - $840,000 for the year. If your gross profit margin were to drop to 28%, you would then need to produce $75,000 in monthly volume to break-even, $900,000 in yearly volume.

Please keep in mind that no profit can be made until your break-even point is met. And, if gross margin erodes even a few percentage points, it can really hurt your company's profitability.

In my next article, I will write about the third group of numbers you need to review regularly - cash flow and ratios.

I write for the Contractor Power Newsletter on a regular basis and am always looking for interesting and relevant topics. If you have a business-related question you would like me to answer in one of my upcoming articles, please feel free to contact me at info@paradigmstrategies.com. If you would like to read any of my previously written Contractor Power newsletter articles, you can view them at www.contractorpower.com.

About the Author

Kevin Lister, founder and president of Paradigm Strategies, the business advising firm to the trades, is a leader in the field of business performance improvement. He possesses nearly 20 years experience in business management and consulting, effectively operating his own ventures and assisting others with realizing business success.

With an entrepreneurial spirit and a business owner's point of view, Kevin brings hands-on expertise to helping building contractors, sub-contractors, and suppliers. Kevin has deep knowledge and understanding of the trades, based on fifteen years in the construction industry, a family history of owning trades businesses, and a genuine interest and enjoyment in helping blue collar enterprises.

Kevin possesses a Masters of Business Administration (MBA) from Olin Graduate School of Business at Babson College and a Bachelor of Science in marketing from Bentley College. He teaches management and marketing for the University of Phoenix Online.

Kevin is a member of several professional and business organizations, including the Institute of Management Consultants (IMC), the Associated Subcontractors of Massachusetts (ASM), the Builders' Association of Greater Boston (BAGB) and the Boston Chapter of the National Association of the Remodeling Industry (NARI).

Kevin has been awarded the Certified Remodeler Associate (CRA) designation from NARI. He has also been named to the board of directors of the Eastern Massachusetts Chapter of NARI.