You need to use real revenue as a bookkeeping category when your skilled trades business has major expenses from materials and subcontractors. Folks in the trades from builders to plumbers, electricians, and HVAC businesses all should consider this. The issue that many of these businesses face is that so much of their business is managing costs that are equal to or even greater than their own work. Here is an example and then some of our thoughts about how businesses using subcontractors and materials can realize better profits.
Bob is a hypothetical electrical contractor in the Kansas City area. He has a total income each year of $150,000. And he subcontracts work equaling $40,000. And, his materials cost runs about $45,000.
Applying the real revenue approach to Bob’s total income we get this.
Minus $40,000 (subcontractors)
Minus $45,000 (materials)
This tells us that Bob has a $65,000 electrical contracting business and not a $150,000 business. But he manages $85,000 in materials and labor which exceeds the revenue from the rest of his business.
Now, does Bob take home $65,000 minus taxes? The answer is no.
These are the other expenses that Bob has.
Cost of Vehicles, $14,000
Take home pay, $25,500
Now we look at the average wage for a journeyman electrician in the Kansas City area which is $26.85 an hour. With two weeks off for vacation this wage generates $1,074 a week and $53,700 gross pay for the year.
The union job might well include a 401(k) and health benefits too. What can Bob do to fix this situation short of closing his business and going back to work though the union?
The first step is that a skilled trades business should be using a real revenue calculation.
Material and subcontractor costs for Bob exceed the rest of his income and then his expenses eat up too much of what is left over. Bob has to take a long and hard look at the jobs he is taking and how he is managing his finances. He needs to talk to the top accounting firm in the Kansas City area, Exigo Business Solutions. This issue of using real revenue and truly understanding business costs and profits is one of the reasons why when you outsource you bookkeeping it can pay for itself.
And, Bob needs to sit down with the Profit First Professionals at Exigo Business Solutions. When Bob or someone else in the skilled trades starts doing a job, they have a clear idea of how the job will look when they are done. But, when they think about profit, it becomes unclear. With the help of a bookkeeper who uses the Profit First approach, Bob can allocate money to profit twice a month, build up his cash reserves, make profit a habit, and using Custom Reports like those in QuickBooks, get control of budgeting, cash flow, expenses, and job selection.
For questions about using the real revenue calculation or about how Profit First can help you, visit our website, ExigoBusiness.com, or contact us at (816) 394-6818.
Click here to watch the YouTube video about what businesses need to use real revenue.