Many construction companies utilized their own equipment in the execution of their contracts. They’ve made a determination that there is sufficient potential utilization that ownership is better than renting for a job for various economic and efficiency reasons. They use the market rental rate or an internally determined rental rate within their bids. Once the job commences, many contractors do not account within their job costing for this equipment. The effect is to overstate profit during the ongoing job review or at the end of the job, since costs within the bid are not considered on the job cost. Thus, the contractor can overrun labor hours and cost, overrun materials or subcontracted costs, and this is offset by the zero equipment cost posted.

The same situation occurs when a computed labor rate is used in the bid. More often than not, the labor rate exceeds the actual labor rate, and the effect is the same overstatement of profit. Buy out gain of materials or subcontractors post bid award, again has the same effect.

There should be posted to the job an internal rate of rental by day, week, or month as is applicable. This should be compared routinely to the expenses of repairs, parts, useful life depreciation, interest on the equipment loans, and possibly fuel and any other costs of the operation. This is a profit center, or the contractor would never have purchased the equipment in lieu of renting. It’s simply another means of profit in your business.

Buy out gains on materials, equipment, or subcontractors should be tracked and reviewed for the same reasons and the net buy out should be entered into your job costing system as the “estimate” if your system does accommodate an area for buy out gain.

Labor rate variances of bid rate to actual are often 10% or higher or more. Buy out gains can range from 1% to over 5%. Depending on how much of your own equipment makes of the bid, it can vary the results by 2% to 15% or more. When you add these up, it can create a false ongoing review of the job, then when you review your financial statements, you haven’t earned as much as you thought. Contractors lose confidence in the financials and assume it’s just errors or accountant’s tax moves, and the financial problems on the job are not identified specifically, not addressed, and they simply persist leaving tens of thousands to hundreds of thousands of dollars lost by simply not knowing what is occurring because it’s masked by these other profit centers (equipment, buy out, labor rate).

A simple analysis of your completed jobs compared to estimates, coupled with a financial statement presentation that mirrors the components of your cost of jobs estimated can be accomplished by a knowledgeable construction financial person. If they don’t understand this, change the internal or external accountant.

Over the years of working with companies as a consultant and running companies, it has amazed me as to how many accounting personnel within companies and, even worse, how many outside accounting professionals just don’t understand how that business is organized to “MAKE MONEY”. I’ve heard, “I just can’t get the information that I request”, or “I just look at the bottom line of my financials”. All too often financial personnel and professionals are not trained in the fundamental profit controls of the company for which they work, don’t ask questions to learn, and simply do what they know how to do, not what the business requires.

The purpose of an outside accountant is to not only prepare taxes or provide an acceptably formatted financial statement for your bank or bonding company, but to understand and challenge the financial controls of your business. If they don’t understand the nuances of your bidding process, if they’ve never questioned it and requested information to support what has been explained, it’s likely that your internal personnel are preparing financial statements in a format to support whatever your accountant asks. The accountant will often do what’s been done before, utilize a format that supports them in preparing your tax return, but not supporting management needs and profit control requirements.

A financial statement is simply a control or “sanity check” to determine if what you think has occurred during the last month, quarter, or year is accurate and consistent with the internal information (or gut sense) that you’ve assimilated and with which you’ve managed your company. The purpose of monthly financial statements is to allow more rapid response to issues that arise when the financials don’t match what you think occurred or by effective analysis of key trends and data, focus the company better on means of increasing profit. This can only be effective if the accountant asks questions, verifies responses so he or she truly understands the issues and business.

Question, when was the last time your accountant took the time to conduct an in depth review of your financial processes, procedures, and statement presentation? When was the last time that you had a meeting with your internal or external accountant and learned something new about your business besides tax planning? You are in the business of making money. Profit should be the primary topic of every conversation with your accounting or financial professional. If you don’t take away something that is implementable routinely from these meetings, then you are either perfect (never saw a perfect company) or missing profit and cash flow.

The simple purpose of your outside advisor is to increase profit, increase cash flow, maintain compliance needs, and to MAKE YOUR LIFE EASIER. Ask yourself the question of whether all those primary issues are addressed. If not, you’re missing profit and missing the right professional.

When that nasty letter arrives from the IRS or your state’s auditing division informing you that an audit is on the way, how do you respond? I’ll take care of it myself with my internal staff? I call my accountant and fax over the notice? Ignore it, and hope it’s forgotten?

Regardless of whether or not you are concerned with IRS deductions/income, sales/use tax, or employment issues, it’ll be the best use of your time and money to request your qualified accountant to conduct a thorough “pre-audit” of the years to be reviewed…and potentially the subsequent and previous years should you have a consistent potential exposure.

A thorough “pre-audit” will identify potential tax causing exposures, allow you and your accountant the time to prepare documentation to support your issue (if found), create a strategy for the audit to mitigate the potential issues during the governmental review. When the auditor sees that your information is out of control, disorganized, can’t answer questions, they just seem to laser in on their work. If they see documentation prepared, it’s organized, they have a place to work with your accountant present (at all times) – not the owner- either at the accountant’s office or your place of business (preferably the accountant’s office), there is a greater chance of success.

20 years ago, I represented a large residential development and construction company. In pre-audit we found a number of personal items such as his wife’s clothing and trips to Europe among many other potential issues. We had a potential problem. We made sure that the sample homes had closets filled with clothing, that the trips had some documented relationship to their home design and to the furnishings of the sample. We had a strategy of giving the auditor a tour of the models, then worked off site at the accountant’s office. In the end, the issues were still the issues, but the client received a “no change”, not because of lies or destroying documents, but by preparation, designed work flow, and by providing pre-prepared documentation.

When you “skim” cash in substantial amounts, run your new home through the cost of goods sold (or in one case a yacht), buy expensive jewelry for your spouse, take little salary or distributions and run all of your personal expenses through the company, you run the risk of fraud, enormous penalties, back and forward interest, or potentially litigation and/or jail time, and personal and business embarrassment or ruin. There are so very many ways to avoid taxes, defer income/taxes and to maximize deductions. In the end, the combined tax rates (state, local, federal) of the worst taxing parts of the country are still under 50%. Best advice - learn how to make more money so that the taxes almost become irrelevant.

Look for tips in this and future newsletters on HOW TO MAKE MORE MONEY on your current activities.

Whenever our firm is implementing change in an organization, we emphasize to the executive and middle managers that truth telling and truth facing will be the hallmark of our process. If the people with whom you are working can’t trust that you’ll tell the truth, you can’t get commitment, and when you make commitment, you build hope…when you keep that commitment, you build trust, when you have trust and commitment, you get ownership of the work performed and results!. Respect guides you to tell the truth and adds momentum to doing the right things well. If you can’t establish respect, you can’t get trust. If no trust, no commitment. If no commitment, results are poor and time is wasted.

It’s difficult for most to embrace changes in the way things need to be done. For business ownership, they are naturally concerned about changes to the way the business got to where it is now, will key personnel quit, the cost, will it really make us better? Thus, for our firm, we establish trust as an immediate goal. We do this by delivering the results intended and by accomplishing what we were hired to do on time and within budget. To establish loyalty to both the company and to the process, we always seek to acknowledge the contribution of others and promote it, both in front of them and in a public forum. Problems are discussed in private, yet we expect that “pride” will not get in the way of a manager or executive apologizing to the targeted parties and doing the obvious “right thing” when an obvious “wrong action” has been done.

Finally, don’t blame someone else when things go wrong. Demonstrate your own accountability to the commitments made to the company. “Step up”, make commitments and accomplish them, treat co-workers with respect, be completely honest in communications, and you’ll not only “get what you measure”, but also, through a defined process for positive change, you will create a powerful workplace, greater profits and revenues!

My marketing director sent me this poem last month during a time of personal disappointment and stress.  I’d like to share it with you.  It reminded me of how normal and important my family, children, loves, relationships, friends and business are to me.  They do not present a “perfect world” to me daily, but each has become a part of who I am and how I view myself. They have helped me realize the importance of their love in my daily life.  I hope you find your own insights from this inspiring poem……

Every morning you wait
on a chair, suit,
for my vanity, my love,
my hope, my body
to fill you.
I have hardly
emerged from sleep,
I leave the water,
I enter your sleeves,
my legs search for
the hollow of your legs,
and thus embraced
by your untiring loyalty
I go out to walk the pasture,
I enter poetry,
I look through the windows,
things,
men, women,
events amd struggles
keep shaping me,
keep confronting me,
making my hands work,
opening my eyes,
wearing out my mouth,
and thus,
suit,
I also keep shaping you,
pushing out your elbows,
tearing your threads,
and thus your life grows
in the image of my life.
You flap and rustle
in the wind
as if you were my soul,
at bad moments
you cling
to my bones,
empty, at night
darkness and dream
people with their phantoms
your wings and mine.
I ask
whether somday
a bullet
from the enemy
will stain you with my blood
and then
you will die with me
or perhaps
it may not be
so dramatic
but simple,
and you will gradually get sick,
suit,
with me,
you will grow old
with me, with my body,
and together
we will enter
the earth.
That’s why
every day
I greet you
with reverence and then
you embrace me and I forget you,
because we are one
and we will go on facing
the wind, at night,
the streets or the struggle,
one body,
perhaps, perhaps, motionless someday.

Upon reading of the death of Peter Drucker, I was reminded of the problems of family business, individual accountability, and succession of which he wrote years ago. In the over 30 years that I have worked with family owned businesses there have been so very many occassions wherein the business is on the brink of failure, will fail, or has substandard performance because the company has not been prepared for “up and comers” from the family within the enterprise. All to often these “up and comers” of the family are either faced with a lack of financial management or operational management training and preparation, or capital investment into equipment, plant, marketing, or key personnel (with profit and growth accountability) has for years been ignored in favor of stripping the company of cash or the complacency of “I made a profit” regardless of what that profit should have been or was needed to compete in the ever changing business environment. Often times, even if the noted problems have not taken place, so as to undermine the success of the business, some or all of these “up and comer” successors, just will never make it in the busisness. Instead, their lack of skills, absence of capacity to manage and lead, and lack of earned respect from critical non-family employees dooms the enterprise to mediocrity or failure.

One of the best investments family ownership can make is to contract with experienced and performance oriented outside resources to create an implementable program of business training in the financial management of that particular business, in operations, and sales management within an accountable (to profit and revenue growth) standards. Let them earn the operational roles and respect of the employees, while effectively getting an MBA in their own business. If they can’t or won’t perform, then pay them if you must, but let them stay home. Critical operational roles should never be an entitlement or inheritance as the stock may be. The business can’t succeed unless critical ownership and management can demonstrate their ability to perform to norms that are at a minimum required for profit, growth, and value building, and clearly outline what other critical employees can expect of that family manager…thus respect, leadership, non-family employee accountability, and the opportunity to maximize planned profit and revenue growth become practical and achievable.

I was speaking to my brother Sam, a partner in a CPA firm, about a mutual client requesting a “what to do” regarding controls and profit missing…and theft… at a client company. I had delineated the obvious controls missing previously, but, again, they requested “what to do”. They wanted a “to do” list. Beyond “fix it”, the client personnel didn’t understand that the question was, in fact, the problem. Management of the troubled company never recognized the problem, or if they did, they either ignored it or didn’t know how to fix it. They believe that the implementation answer is in a book…or worse…a report, not in a process of changing themselves!

I remember years ago reading a book by the name of “Reengineering the Corporation”. It was a case study, “how to” book on changing process in a company. The book was immensely popular, however within 2 years a second book came out entitled “Reengineering Management”. Changing people and process hadn’t worked as envisioned for the readers of the book who tried to change things at their companies, because management hadn’t changed the way they see and act daily.

It’s been my experience throughout my 30 plus years of working with management as a CPA partner, senior executive of a company, or consulting analyst/implementer/executive/business advisor that nothing ever changes unless senior management can be held accountable both operationally and financially to the changes envisioned. Accountability by definition in the dictionary is the state of “being obliged to account for one’s acts; being capable of being accounted/responsible”. The word account means to determine, reckon, or measure, thus management must be subject to discipline and reward if what they do, that is agreed upon (buy in) and measurable, is done to desired timelines and results, or not done by inaction or failure to perform as agreed. The concept of “buy in” means that if something is achievable by definition and by establishing its reality, so all know it can be done, then, if management won’t do it or can’t do it, nothing will be accomplished. Thus management must be changed physically or by process in those circumstances…even the operational role of a privately held company owner…if change that will measurably increase profit and ease operations is valid, achievable, and if the company is focused on continued financial success. Leadership of the company must have the continuing WILL to change and be better for their revenue growth, profit goals, customers, and retention of good and valued employees in order to assure that result.