Teaching Profit/Loss

Jud Motsenbocker, CGR, has been teaching remodelers how to understand profit-and-loss statements for years. It never fails, he says, to have an attendee call him later and ask to have it explained again. It’s that important. In fact, the income statement, or P&L, is probably the most critical piece of management information a remodeler needs to run a successful business.

"You should review [the P&L] regularly so you actually know what it’s costing you to run the business," Motsenbocker says. Knowledge of the cost of sales, coupled with knowledge of overhead, enables remodelers to price projects that will then produce the income they require.

"You must know your operating expenses to know whether or not you made money," Motsenbocker says.

"For example, if your P&L reflects overhead at 25 percent and the job costing shows 26 percent or less, you didn’t make any money."

Cost of sales and operating expenses are deducted from a company’s sales volume to produce operating income, or net profit. Once a remodeler determines how much that number should be, he should consult with his accountant to build the budget, which is based on the income statement.

"Cost of sales expenses are anything that you can attribute directly to a job," Motsenbocker says.

"Operating expenses are items that do not directly go to a job."

Motsenbocker says operating expenses should be reviewed at least quarterly, monthly at best. “Keep track of the budget compared to actual expenses in order to know whether or not to adjust the markup in order to make your profit,” he says.

"Cost of sales has to be dealt with over time. It’s not something you can adjust every month. You don’t necessarily have to react to every red flag, but you should be aware of what’s going on"