by Pam Schulz, Sage Certified Consultant

5 things to know about your numbersincome-statement

Smart owners and managers use standard financial reports to study profitability and organizational health. But by looking beyond the Income Statement, you can find critical information to improve Estimating and Project Management.

1.  What is my Margin (Gross Profit)? How does this relate to my Markup?

Firstly, knowing your Margin is important! Your MARGIN is the Job Profit divided by the Sales Price (contract amount). Margin and Gross Profit are sometimes used interchangeably. A $100 job with 30 percent Gross Profit will contribute $30 to cover Company Overhead and contribute to Profit.

Secondly, it is important to know the difference between MARGIN and MARKUP. Markup is the Profit divided by the COST. So, on any given project, the MARKUP percentage will be higher than the MARGIN (Gross Profit) percentage.

A classic example:

  • Job Budget – $67
  • Markup – $33
  • Contract – $100
    • The MARKUP is 50% ($33/$67)
    • The MARGIN is 33% ($33/$100)

Therefore, having a clear understanding of Markup and Margin is important for a couple of reasons:

  • Many companies have a “target” margin for jobs to achieve
  • Knowing the bottom line helps determine if a job is worth taking
  • Clearly, a misunderstanding of Markup vs Margin could cause costly estimating mistakes

2.  What is my Labor Burden?

Labor is expensive. Consequently, the burden on labor is truly a heavy burden. It is important for everyone involved to understand and agree on what is included in the Labor Burden. Payroll costs in Sage 100 Contractor are posted as “burdened,” but do you know what that means?

Look at the Payroll Calculation setup in menu option 5-3-1. Payroll calculations with a type of “Employer Costs” and a General Ledger account in the “Direct Expenses” range for the “Job Account” will be included in the Labor Burden when payroll is posted. Does this agree with what is being used in Estimating? If not, then reports comparing Budgeted Costs to Actual Costs may be inaccurate because of an “apples to oranges” comparison.

Identify items that are considered Labor Burden versus those that may be viewed as overhead and make sure the Budgeted amounts and the Posted amounts use the same assumptions. (Make sure Estimating and Accounting agree.)

You can create a fairly simple report to compare the “wages” and the “total costs” on job cost journals to test the labor burden that is being posted. Adding a field to one of the reports at menu option 6-1-2 (Job Cost Journal) can provide a quick look at the posted difference.

3.  What are my Estimating “hit ratios”?

  • Are you bidding enough work?
  • Are you getting the “right” size/type of jobs?
  • Do some clients have you bid LOTS of jobs and award very few?
  • Are some estimators more successful than others?

Knowing these answers can help you spend your estimating resources more wisely and help plan future workloads. Reports are easy to create using the date fields in the job setup (menu option 3-5) screen.

4. What is the average time to collect receivable invoices?

This information can help plan cash flow and is also good to know when planning the Schedule of Values. It is not uncommon to pay for (your) labor that you are not paid for (by the client) until 45-60 days later.

Particularly, some clients are slower to pay than others, and reviewing the average days to pay can help identify them. You can create a custom report to analyze this- this type of report would require some intermediate Report Writing skills, but could provide valuable cash flow information.

5.  What are the profitability ratios of some Job Types/Supervisors/Clients compared with others?

This is easy — in fact, many of the Sage job reports are already available sorted by these criteria.

Perhaps not every type of job should be measured in the same way. Knowing who and what is most profitable can help channel scarce resources.  Furthermore, it is also beneficial to identify types of work that should NOT be pursued.

Of course, there are countless metrics that can help you manage more profitably and effectively. Identify what would be most useful to YOU and create Sage Report Writer reports keeping you informed beyond the income statement.

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Posted and Committed Costs in Sage 100 Contractor