Raise your hand if you like profits. I bet everyone has their hands up. But do you really understand what profit is, why you might have losses or how to read an income statement? I lot of contractors excel in their field: water well, geotech, geothermal, whatever. But knowing how to discern the health of your business — and making corrections as needed — is a different skill set. It’s one every business owner should have.
Last month in this space, I discussed the importance of a cash flow statement. This month, I’ll touch on the income statement (also known as a net income statement or profit and loss statement). Together with a balance sheet, the cash flow and income statements give a full picture of just how healthy — or unhealthy — your business is. This overview will explain what an income statement is and why it’s important. Sit down with your accountant to get a full, professional explanation of your income statement, what it shows for your business and how to chart a course toward profitability, if necessary.
What is an Income Statement?
Like a cash flow statement, an income statement covers a period of time. Unlike a cash flow statement, an income statement won’t tell you how much you have in the bank. Like a cash flow statement, an income statement can also go into detail about all the revenue and expenses a business has. But, unlike a cash flow statement, an income statement accounts for “paper” expenses that don’t necessarily come out of pocket, but still affect profitability and, ultimately, the taxes a business pays. Interest paid on any bank loans, for example, shows up on the income statement, but not on a cash flow statement. Depreciation on that drilling rig (or any other major equipment) likewise shows up on the income statement but not a cash flow statement.
An income statement, to put it bluntly, is the answer to the question, “Is my business profitable?” A good rule of thumb is to review your income statement every month. Make a habit of it, whether you pull it yourself from QuickBooks or request it from your accountant.
Why Do I Care?
Contractors need to know how profitable their business is, and make changes if necessary to get profitable. Their livelihood, and the wellbeing of their dependents and employees, is at stake. So, how does all work?
If gross profits minus total expenses is a positive number, congratulations, you’re making a profit. If not, that’s an issue. As with cash flow, a negative profit over a few months or a quarter won’t sink your business. It should, however, get your attention.
Improving on the Margins
An unprofitable business has options: boost revenue or cut expenses. Boost revenue by taking on higher-paying projects, working more projects or adding other revenue sources. Cut expenses by trimming where it makes sense. The key is to cut in ways that don’t affect revenue, or cut out low-margin jobs to free up time to take on higher-margin projects.
Contractors who fall short of profitability, or those who want to boost their profitability, should take their accountant out to lunch and discuss strategies. Some good questions to ask:
- Do I have the right pricing for the services my business offers?
- Are there services I should consider adding, or other potential revenue streams that have a good margin compared to my current margins?
- How can I better manage my expenses?
Talk to other drilling contractors about what works for them. Get creative. For example, maybe you could rent out equipment when not in use. Whatever you do, keep margins high and expenses low.
What do you think? Have you overcome profit challenges? How did you do it? Share your thoughts. Send an email to firstname.lastname@example.org.