Within financial management, you can establish systems that encompass budgeting through developing and reviewing financial reports. Review your financial reports in a systematic format. The best way to analyze your income statement is to start with the top section, where overall revenue, costs, and gross profit earned from your jobs are reported. To understand what these numbers are telling you, you will need more detailed information from supporting reports that include detailed job cost reports that agree with the revenue, costs, and gross profits reported on the income statement.
Start by looking at your overall results for the period broken out by open and closed jobs. Is your current work in process more profitable than projects you have completed? Next, examine margins by the type of project you are doing. Did margins on your custom homes on the buyer’s land come in according to plan? How about your remodeling work and custom homes on your lot? Were they completed within your budget?
After identifying the areas of major concern, you need to start reviewing variances on the project that make up the major area of concern. For example, ABC Custom Builders planned on a margin of 20%. Margins on completed jobs were reported at 19.5%, while jobs in progress only showed an overall gross profit of 15%. In order to identify where this slippage is occurring, ABC reviewed its margins by project type and noticed that remodeling projects were on target but custom homes on the buyer’s lot were showing a major variance from plan. Looking further, ABC identified the Smith house as one with a major variance. The crisis manager identifies this and jumps on the superintendent on the Smith job. The problem solver will dig deeper by reviewing the detailed job cost reports on the Smith project to identify the source of the problem.
In reviewing the Smith job cost report, ABC Custom Builders noticed that framing appeared to be going over budget. The problem solver will investigate the cause of this variance. Does the variance relate to needing more lumber due to the fact that the framer cut the 2×4’s differently than planned? Or was additional material needed because the lumber that was dropped on the job “had legs” or was damaged by weather or was necessary because the owner decided to make changes to the plans? Did the lumber supplier charge more for the 2×4’s than the unit price that is in the estimating database? Did the framer charge more for his labor? Did the additional charge relate to poor supervision, extra time spent on the job waiting for material, not getting a firm price from the framer up front? The problem solver will dig until he finds the cause of the problem.
Once the reason for the problem has been identified, the problem preventor steps in and asks, “What can I do about it?” The problem preventor looks at the existing systems to determine what changes need to be made to modify the system so he won’t have the same problem next time. If, for example, he finds that the framer cut the 2×4’s differently than planned, he can either discuss this issue with the framer or add a waste factor into his estimate. If there’s a theft problem on a job, he can develop better security procedures.
Within job cost management, you can establish procedures for collecting and analyzing job costs as well as handling change orders and extras. Make sure your accounting system is tracking job costs in the same categories as your estimate. For example, if you estimate labor dollars using an hourly rate that includes burden, make sure that your accounting system posts both gross pay and labor burden to the job.
Systems can also be established to manage cash receipts and disbursements as well as forecasting cash flow. Understanding and systematizing your business management systems will lead to higher profitability and a more smoothly running organization, moving you from a crisis manager to problem solver to problem preventor.
