Many residential plumbing business owners don’t realize that one of their best management tools is their Profit & Loss Statement. This document is also called the Income Statement. The owners don’t realize what a fine tool this is because their accountant set up the Chart of Accounts. The accountant’s sole purpose in life is to file taxes, so they want the P&L to be as simple as possible. What you end up with is a single sheet of paper that says Sales, Expenses, and Profit. It basically tells you absolutely nothing.
If you will set up several sales accounts, like plumbing repair, water heaters, excavations, house re-pipes, drain cleaning and some others, it is easy to find out where your sales are coming from. Knowing your sales mix will help you determine where to invest your marketing dollars and what to advertise.
Then set up Cost of Goods Sold accounts for each sales account to track labor, materials used, permits, sub-contractors, fuel and equipment rentals. Now you can determine your actual Gross Margin in each category. Labor and sub-contractor cost should never exceed 18% of sales in each department. Material costs should not exceed 12% for plumbing repairs and basic installations, while water heaters will be around 20%.
Subtract Cost of Goods Sold from Sales and what is left is Gross Margin. Most accounting software calls it Gross Profit, but how can it be profit if you have not removed all your expenses yet! The Gross Margin target is 60 to 65%.
Everything else is considered General and Administrative (G&A) Expenses. Use some logic setting up these accounts. Labor for administrative office and owners, and all the wage expenses should be grouped together. Facility expenses, like rent, utilities, telephone, maintenance and repair should be grouped together and so on.
Items like Depreciation, Interest Income, Rebates, and the like should actually be listed under your Operating Profit. The Operating Profit is derived from day-to-day operations and keeping it clean will help when comparing period to period for accurate information.
With a clean, accurate Profit & Loss Statement and information concerning the performance of your technicians, you will find it much easier to manage your business and make it more profitable.
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