Episode Transcript
[00:00:09] Speaker A: If your forecast looks fine, but your bank account doesn't, then this episode is for you. And we are sponsored by performance margin software. So thank you to that group for sponsoring this episode.
Tommy, what do most people get wrong when they're budgeting?
[00:00:26] Speaker B: Oh, my gosh, that's a great question. Because it's the way that they set up their accounting that kind of skews their budget right off the bat. If you don't have your charts of accounts in a line, your budget is going to be all over the map. So our process is going to break that down, make sure your charts of accounts are aligned, and it will give you a whole different picture on what you should be looking for.
[00:00:55] Speaker A: So people will build a budget once a year. Right.
And maybe not revisit it again the whole year.
They never reconcile it against actual job performance.
So you set this budget, but you don't know how you're performing against the budget.
Revenue on target doesn't really matter if the gross margin per job is slipping.
[00:01:18] Speaker B: Right.
[00:01:18] Speaker A: It just doesn't. And so let's talk about that overhead. Let's talk about how those chart of accounts should be set up. Insurance, administration, equipment depreciation is not something that most people fold into a job cost. Right, right.
Rent, subscriptions, etc. A lot of owners just sort of treat these things like background noise rather than assigning them to a job cost and then applying your margin on top of that. So what happens when overhead quietly grows 8 to 10% year over year?
[00:01:56] Speaker B: Well, let's talk about that. The overhead is your budget. Whether you sell $1 in services and goods or a million dollars, that never changes. And if there's creep on that, where you set your target originally, it's is going to diminish. So that money has to come from somewhere, and it usually comes from your bottom line.
[00:02:17] Speaker A: This is where your spreadsheet isn't lying, but it's just not telling the truth either.
[00:02:25] Speaker B: Right? Right.
[00:02:26] Speaker A: It's truth of omission or lying of omission.
So your budget may look great, but it's not telling you the whole story unless you're factoring all of these things in.
[00:02:37] Speaker B: Exactly. And once you assemble your charts of accounts properly, then you can move the buckets in the right places. Like some of the words you mentioned, depreciation. We bring that up in cost of goods and associate it with your equipment. And then we basically educationally guess on where that depreciation is through numbers that are accurate, through accountings and taxes. And then we factor in that against the Number of hours this piece of equipment works. So it actually goes under your hourly rate.
[00:03:10] Speaker A: That's a great example. So my next question was going to be how does the performance margin software help owners actually see this clearly? So that's a really good example. Maybe.
What about the labor rates?
[00:03:23] Speaker B: Labor rates? Exactly.
What you pay a person on their check isn't what they're costing you. There's cost behind the scenes, there's taxes, there's insurance, as in work comp, general liability. If you pay for their insurance, that's an expense against their hourly wage.
[00:03:41] Speaker A: Like their medical insurance.
[00:03:43] Speaker B: Exactly. Any benefits. And then you basically need a break even burden cost for your hourly rate for your employees. And not all your employees are the same.
[00:03:53] Speaker A: So that's a good point too.
[00:03:55] Speaker B: Yeah.
[00:03:55] Speaker A: Not every employee is the same.
[00:03:57] Speaker B: So. And the, the benefit of the performance margin software is you can override your cost to make them the same, but you know your costs are covered first.
So that's, that's a great piece.
[00:04:13] Speaker A: Yeah. So when your revenue isn't separated by department or by work type, those blended margins tend to hide a lot of sins. They hide a lot of underperformance in areas. And so we will help you kind of call that out so that you can see exactly what line items in your actual expenses are underperforming that might need correcting in order to boost your overall margin.
[00:04:41] Speaker B: It creates a conversation between your estimating team and your performance team, the people doing the work. So there's a view in the software called the foreman's view that the foreman actually inputs actual, so you can see how each job is performed. Again, these are like exercise equipment. If you don't use them, they're not going to work. We can't guarantee that. But if you use them, how they're applied, you will see positive results.
[00:05:10] Speaker A: A lot of owners will include a service line, a service line item of some sort. And it makes them feel good about their business that they have this offering, this line item. But that is a common one that we see kind of dragging on the net margin. And Sometimes it's only 1, 2 or 3%, but it's still a drag. It's not providing profit for you. So that's a real common one that we see.
[00:05:35] Speaker B: And those are cumulative percentages. So they again, they have to come from somewhere and if they're not properly allocated, they're going to come from your bottom line or your net profit.
[00:05:46] Speaker A: So just to kind of do a quick deep dive here we, we tie the budget to a trailing twelve month Gross margin.
We forecast using margin targets. All right, not revenue targets, but margin targets. Oftentimes, revenue ends up surprisingly much higher.
When we do it that way, we allocate that overhead by revenue percentage. We help them with that. And then we monitor cash flow monthly.
Not quarterly, not annually. Like, it's not something that we just go back and revisit once a year. When we become part of the team, we integrate and we really launch new businesses. Well, even established businesses. So the budget is not about.
It's about predicting, it's not about controlling.
[00:06:36] Speaker B: Correct.
[00:06:37] Speaker A: Yeah.
[00:06:37] Speaker B: And the other piece is we go back two years of your past profit and loss statements. If they aren't accurate, we correct them outside of your software, and then we generate new profit and loss statements for the year they're applying for. So we can set a target that's realistic. And we're not just shooting from the hip. We have data, your data, that we put against this to figure all these pillars out.
[00:07:04] Speaker A: And that control that we're shooting for, that calmness about your business that we want for you is it just comes from visibility. So we're just kind of widening the aperture of the camera to show you your business at a much greater level of detail. And yeah, so that visibility is really
[00:07:25] Speaker B: important and it sounds overwhelming, but we're here to take a lot of that burden away from you. We'll have some questions, but our onboarding process will help you with your inputs, with your questions, with. With your trajectories on going forward.
And our goal is that this is just idling alongside you as a check of how your performance is going. Hence, performance margin software.
And remember, take her. Cool. It's going to be okay.
[00:07:55] Speaker A: It's all going to be fine.
