Click on the link below to see a chart illustrating how gross profit margin can change even after WIP calculations. Is this you?
monthly-gpm-variability-real-life1
Even the best remodelers can end up in a quandary about the truth of their financial statements when gross profit margin slithers all over the map. Here’s a real life example (data changed slightly to protect the innocent) from a good remodeler who uses WIP calculations monthly to determine true earned revenue.
What does it tell us? Nothing valid without further investigation; here are a few questions we might ask:
- Are you doing new types of work? This could definitely account for wild swings in gross profit margin. It takes experience to accurately estimate different types of work as well as field experience to produce it within budget.
- Are you doing work with new field people? It takes 6-8 months for most field people to get broken in to new systems and routines at any company.
- Have you hired a new bookkeeper or changed accounting systems? Construction accounting is the most difficult (according to my brother, a CPA) because it requires great attention to small details which change rapidly over time.
- How do you calculate cost to complete? Without a reasonable and verified cost to complete calculation factored into your WIP adjustment, gross profit margin can swing wildly. Field people who look at the job site and say concrete, for example, is 100% finished might not know that the accounting system has not received nor entered the concrete bill. Cost to complete could be in error by this simple but vital failure of communication.
- With what documents do you proof the WIP calculation? If there is to be any reliability on the produced gross profit margin after WIP adjustments, it sits in the ability to relate information on the WIP spreadsheet to that in the accounting system. That means that contracts + change orders and budgets + change orders, job costs and total invoiced must all have a direct relationship between the two buckets – WIP spreadsheet and accounting system.
Visit my website at www.remodelservices.com, click on “downloadable files/Margin Variability” to build your own chart!
If you’ve got any questions about how to make your financial accounting better, please call me. I love this work!