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Sound Business Management Crunch Time Why contractors don't know their numbers By Monroe Porter realize that contractors don't like me harping on knowing your numbers, and contractors as a whole don't like accounting and bookkeeping. I also recognize I must sound like a broken record. However, 90% of the financial problems we see contractors struggling with have something to do with numbers and usually poor financial information. I am dedicating this article to helping you understand why and how to combat that. First, let's discuss what causes this problem prior to offering some ideas on how to fix it. Leave it up to the accountant attitude: Many contractors simply delegate financial tallying to the CPA who handles payroll and taxes, including the payroll and income requirements. The problem is that the accountant is merely acting as a scorekeeper and makes no decisions regarding the business. This would be like a basketball coach going to the scorekeeper once a month to determine what plays to run. Tallying records for taxes instead of for cost analysis: If you don't record information in a format that matches how you estimate and do jobs, it will not be helpful. Taxes are calculated on the bottom line, and while the profit total may be the same, accurate and quick financial analysis is impossible when accounts are not set up in a logical format. Frequently, contractors will fax us a 10-page statement and say they don't understand it. I write on the top that I don't understand it either and fax it back. Since you must go to the trouble and expense to tabulate data for taxes, it makes sense to compile the information in a useful format. I 18 • June 2013 APC Overly complicated records and falling victim to fast/slow brain activities: In his book, Thinking, Fast and Slow, Daniel Kahnema discusses the brain's two systems: System 1 operates from recall quickly and automatically, and system 2 handles more complex information. As I read the book, I realized this brain system contributes to contractors' inability to grasp financial information. Try the following exercise. Add one number to each digit to come up with the next number series. Example: Add 1 to each digit 16; the new number is 27 (1 + 1 = 2; 6 + 1 = 7). Add 1 to each digit 253; the new number is 364 (2 + 1 = 3, 5 + 1 = 6 and 3 + 1 = 4). Now do the following numbers as an exercise, and do the next number as fast as you can. Notice how much harder it becomes to process the answer as the number of digits increases. Simply repeat each answer quickly, and then go to the next. 12 283 3576 47652 874875 2654274 17549428 I bet as the numbers get longer, it gets harder to concentrate and do it. That is because your short-recall brain can't merely answer the problem from recall as the complexity of the problem increases. So herein lies the problem – contractors are busy. Frequently, financial information is not laid out in a simple format, and it is hard to concentrate and follow through. Rather than dig deeper into the complex numbers and figure it out, the contractor merely moves on to one of the many tasks that are nagging him or her. So here are some simple guidelines to use: • Set a specific time and date each month for reviewing financial information: Performing tasks that require concentration also requires scheduling. Turn off your cell phone and email and spend some time working on it. It takes a while to get into the slow brain transitions. • Have an agenda of what to cover: Review your profit and loss statement and balance sheet in an accrual format. Even though your CPA and the IRS may accept a cash format, never use a cash format, as it is not an accurate reflection of your current financial position. Also, review accounts payables (what you owe people) and accounts receivables (what people owe you) to see where you are. Compare it to the previous month and the past year.