Financial Operations: running your tile business the right way
In this issue of TileLetter, we move to the Financial Operations section of the NTCA Business Reference Manual, as found on page 31 in that document. Part A familiarizes you with common accounting terms related to your business, and part B explains the labor burden rate. Check upcoming TileLetter issues for more tips and recommendations on running your business efficiently and profitably. To download the entire NTCA Business Reference Manual, visit www.tile-assn.com.
The relationship with an accountant is vital to running your business smoothly and profitably. Your accountant can advise you on the complexities of federal and state taxes and benefit you with good and proper record keeping. Your accountant can help you decide what type of business classification is best for you, and can be a valuable resource for future decision making.
a. Common accounting terms
BOOKKEEPING – the recording of monetary transactions related to your business.
ACCOUNTING – the financial structure of a company. An accountant helps design financial systems, conduct audits, develop forecasts, prepare tax reports, and analyze and interpret financial data for business decisions. Your accounting should be set up on cost accounting, not tax accounting. Tile contracting is a cost-based business.
CHART OF ACCOUNTS – When you set up your accounting program, the chart of accounts shows a specific numbered category which will be associated with each expense and type of income. A basic bookkeeping program will have a sample chart of accounts, or your accounting professional will have an outline for you to use. Setting up the Chart of Accounts correctly will make all your accounting work run more smoothly.
INCOME STATEMENT – Also referred to as the Profit and Loss statement, the Income Statement indicates how a company’s sales and expenses tally for a specific period of time. The difference between revenue (goods and services sold) and expenses (cost of goods and services provided) for a particular time is net income.
BALANCE SHEET – a “snapshot of a company’s financial condition” – a balance sheet shows assets (what you own), liabilities (what you owe), and ownership equity. The net worth of your business equals assets minus liabilities.
CASH FLOW STATEMENT – The flow of cash into and out of the business is reflected in its cash flow statement. This report is useful in determining the short-term viability of a company, particularly its ability to pay bills. It is useful to managers, accountants, potential lenders and investors, as well as the business owners.
PROFIT AND LOSS (P&L) STATEMENT – A regularly-produced report that shows the overall financial health of an organization by documenting income versus expenses. A well set-up P& L allows you to make good daily business decisions. Note: make sure depreciation is not included in this statement. First, you cannot use it; second, you cannot spend it, and if it is under expenses it pushes up your markup.
b. Labor burden rate
“Burden rate is the total indirect cost, calculated as a percentage of the construction company’s direct labor. In other words, for every dollar of direct labor allocated to a contract, burden is applied as a percentage of the direct labor. But before a contractor can accurately calculate burden rate, all contract costs assumed by the company must be fully accounted for and factored into the final burden rate equation.
“Contract costs are broken into two classifications-direct and indirect. Examples of direct costs include direct labor, materials and supplies, equipment rentals, etc. These costs are obvious inclusions for estimators preparing bids for a potential contract. What may not be as obvious are the indirect contract costs.
“Indirect contract costs that should be part of the final burden rate calculation include:
- Workers’ compensation
- General liability and automobile insurances
- Vehicle and equipment repairs and maintenance
- Field communications expenses
- Employee benefits such as health, life, disability
- Payroll taxes
“All costs associated with paying employees, including FICA, unemployment and Social Security, should be calculated as part of labor, as should vacation time, holidays, sick days, warehouse personnel, training, safety, hand tools, and clothing.
“Variable overhead should also be factored into the overall mix. This category includes all costs directly related to employees that cannot be divided accurately between jobs, such as fuel and cell phones.
“All too often, these overhead expenses are overlooked by contractors and therefore not included when calculating a project’s burden rate. Depending on the benefit package involved, employee-related costs will typically account for 24% to 33% for a non-union contractor. For a union contractor, the burden rate for employee-related costs will range from 60% to 70%.”
– From www.constructionbusinessowner.com.