The accounts your accountant provides at the end of the financial year are backward-looking and probably spark very little interest. Many accountants say they are interested in your business and will help you make money, but in speaking with many clients, people do not feel that this is the case — and are reluctant to challenge their accountant as a professional when they don’t know what questions to ask.
For contractors and consultants, how the accounts are structured is fundamental to getting the price right for upcoming work. A common issue is that your accountant has probably been employed to handle both company accounts and your personal tax. Whilst submissions to HMRC are made separately, accountants often aim to maximise your personal income at the expense of market-rate pay for your activities in the business — which blurs the true profit of the business. Without knowing the true market-rate profit, accurately pricing future work becomes impossible.
Project Information and Gross Profit per Project
Each project should be given a unique code. All costs associated with that project can then be allocated to it, and by subtracting costs from the tendered price, the gross profit can be worked out. For projects over a long period, monthly reconciliations can be carried out to see how projects are going and whether they are on track to make a profit at completion.
If you do a variety of work, knowing the gross profit on each type is useful, as it will help you decide whether it is worth continuing that type of work or whether you need to change how you approach it to improve the return.
Overhead Costs
Any cost that is not a project cost is an overhead: premises, accountants’ fees, insurances, marketing, and so on. By grouping costs into business functions — rather than the generic categories accounting software often suggests — you can see how they compare year on year and whether you are getting a good return on the investment.
Calculating Operating Profit (EBITDA)
All overheads are deducted from the gross profit to leave an operating profit. This is effectively shared between projects in proportion to their value. Importantly, at this stage dividends have not been taken. The operating profit is entirely within the control of the business and does not include taxes and interest rates — it is the figure used to compare business performance when buying and selling, often referred to as EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation).
The Recast Accounts
Recast accounts — adjusted to show market-rate salaries and remove the tax-driven distortions — can be used to calculate the mark-up required on each project to cover expected overheads given your forecasted income. They give you your break-even costs when estimating, to which you add the desired profit to arrive at the tender price.
If the accountant you initially engaged is not willing to help structure the accounts correctly, and persists with total income and expenditure without considering projects, it is probably time to find one who understands the construction sector.
Conclusion
Turnover is vanity, profit is sanity, and cash is king. With construction projects, unless the price is right at the beginning, a profit is unlikely to result. Having a clean set of accounts and a system to maximise profits when tendering is the most sensible way forward — and will give you options.
