There is an old joke about someone asking a lawyer, an accountant and a contractor what is the sum of two plus two. The accountant’s answer is four, the contractor answers three, as he will make up the difference in production or volume, and the lawyer asks what you would like it to be. No matter how hard you try, unless you are the government, two plus two is four. The U.S. debt is so large that if you stacked $100 bills, the stack would be higher than the diameter of the earth. Unfortunately, unlike the government, contractors cannot simply turn to the printing press and make more money.

Every day we receive phone calls from contractors looking for help that are in such a deep, dark hole there is no way to save them. When confronted, they tend to blame the economy or a key employee causing issues but not one of the culprits has good, sound financial records. In fact, in every case their numbers are a mess. Having good financial records and knowing your numbers may not keep you from going broke, but it won’t be a surprise when it happens.

Start by simplifying your accounting process. Set up your income statement to resemble how you estimate. There are two kinds of cost: overhead and direct. Separate direct from fixed overhead so your profit and loss statement shows an accurate gross profit.

Next, have a monthly financial meeting and review both your P & L, a balance sheet, all recently completed job costs, accounts payable, accounts receivable, sales and estimating closing rates and any other pertinent financial data. Your numbers become more accurate by using them and questioning the answers.

Try to make a budget. As hard as one might try, most people either will or will not make a budget. I have found that if your nature is not to make one, you probably won’t. If that doesn’t work for you, then take a profit and loss statement and compare last year to this year. See what costs have or are increasing. Look at your backlog to help you project sales. See where you can cut costs and do so.

Forget old sales to overhead and other ratios. Material costs have dramatically increased in the last few years. What used to be a $10,000 job now might be a $15,000 job. Margins have also dropped. You must take a few minutes and project your current percentage and not merely rely on what they used to be.

If you are losing money, stop the bleeding. Understand that selling yourself out of a loss is unlikely. While trying to sell your way out of the situation might appear to be the least painful option, it rarely works. If you save one dollar, it is yours to keep and, while painful, it is the most realistic option.

There are many ways to relate overhead costs but the most accurate realistic approach is to relate overhead to a function of time, not sales. Most overhead costs are a function of time. Rent, office salaries, truck payments and many other costs are paid weekly and monthly, not as a percentage of sales. Know how much overhead it costs to run your business each month, week and day. This sets an easy and memorable target to hit. If you are a seasonable business and lose money in the winter, try to minimize those loses by cutting costs as much as possible.

 The number one reason most contractors fail is they do not understand their overhead costs. While this might seem trite, I always worry when a contractor states his or her overhead in some type of round percentage such as 10 or 20 percent rather than saying something like our overhead is 16 percent or 22.5 percent. Remember, that as silly as it seems, two plus two is four, not three. Make sure your numbers add up.