How To Master Profit and Loss For Your Electrical Business In 2021

Are you looking to manage your expenses, forecast for the future, and work out the true profit margins for your electrical business? Here’s what you need to know about P & L.

It’s the end of the month.

Time to balance the books.

You’ve been smashing out twelve hour days on the tools. The new marketing campaign is bringing in more new business than you can handle. Your inbox is chockers, the phone won’t stop ringing. Might even be time to bring in an apprentice. 

You haven’t had a chance to put the magnifying glass over your balance sheet - but who cares? It’s easily been your busiest month. The profits will be rolling in. 

Maybe it should work like that - but running a business is very, very different to being paid by the hour. 

Your bank account shows an awesome profit margin of $50 000 - everything must be sweet, right?
Then comes tax time.

There goes your money.

Shit.

What happened here?

In this article, we’re going to break it down for you, step by step.

But here’s the point you’ve got to wrap your head around first.

Your profit and loss is the measurement of your success - it provides clarity around the performance of your business. 

So you’ve got to get it right, and you have to understand it with great depth. 

Your P/L and your balance sheet is more than just a yardstick for your success - it will allow you to forecast your expenses and plan future investments based on that. 

For example, if you want to buy a new van and hire a tradie, you should be able to plug the costs, and associated costs, into your spreadsheet and understand immediately how much additional business you’ll need to generate to pay it off.

At the Academy, we make sure our electricians develop efficient systems to monitor their P/L, really understand what the fuck their spreadsheets are trying to say, and learn how to leverage that into future business decisions.

Too often, electricians don’t have real command over their profit and loss, and end up getting overwhelmed by it. 

Don’t let that be you.

If you don’t understand your P/L, you’ll be running on the spot like a hamster on a wheel.

Just because you run faster and faster, doesn’t mean you’re moving forward. 

This article will teach you how to implement the right systems to track your P/L, understand how to interpret your figures, and learn how you can use the data to explode your business. 

1/ Understanding the elements of profit and loss

There are four really basic elements to your P/L.

Sales and income; this is what you’re earning. 

Cost of sales; this includes your wages, materials, associated costs and hire equipment that goes into getting, and doing, electrical work.

Your cost of sales will probably vary a bit from month to month, because the type and amount of work you do will vary. 

Operating expenses; this includes everything that helps you get business done. For example, fuel for your vehicle, phone, internet, printers, paper and everything else. 

Unlike your cost of sales, operating expenses should be fairly consistent from month to month.

Efficiency; Check out the efficiency calculator in our dynamic scheduling article. Once you know your efficiency, you can work out your Cost of operation per hour by Efficiency. This helps you work out what you need to be charging per hour to actually be profitable.

2/ How to set up an effective P/L system 

There’s awesome technology out there to help you save time and brainpower. 

We recommend making the most of it. Life will be so much easier.   

You can use SimPro for your job management, and Xero for your finances because they integrate easily - there will also be some crossover between the two. 

Once you’ve got the software, you’ll still need to learn how to set it up and use it effectively to get the most out of it - mastering the software side of things is something we cover in great detail in our Academy programs.

3/ Structuring your profit and loss spreadsheet

Break your lines down as much as possible.

This is so important because you need to be able to cross reference your return on investment (ROI) with the decisions you’ve made to grow your business.

Don’t have a line that groups all your advertising or marketing together - be specific.

Facebook ads, Google ads, instagram, SEO or SEM will provide different results. 

This will allow you to test things and invest more money into the channels that are providing the best return. 

You also want to be able to monitor how your investments SCALE - for example, you might have a 5 to 1 ROI on your Facebook ads. But if you triple your expenditure, will you continue to get 5 to 1, or will it go down?

Know what works, and what doesn’t. Try things. Make changes. Be dynamic. Rinse and repeat. 

4/ Reverse-engineer your profit and loss goals

Start with the end in mind, and build up your projections and targets from there. 

Having a measurable goal will help you stay on track.

If you want to boost your profits by 100K this year - what’s your roadmap to get there? 

5/ Make sure everything is closed off at the end of the month

This is one of the most common mistakes sparkies make.

If you reconcile the payment for your materials the month after you bought them, your profit and loss will be completely out of whack. 

Make sure everything you’ve done in the current month is accounted for, and CLOSE OFF THE MONTH.

One of the easiest ways to stay on top of this is to create a bill for every invoice you get - at the very least, you should create a bill for the entire statement, but if you do it this way you won’t have cost of sales transparency. 

It’s simple, but easy to mess up because we often don’t pay for things in the month we actually use them. 

Stay on top of it. 

6/ Anything else?

There’s a lot of other things you need to consider.

Efficient invoicing is really important to take your profit and loss to the next level, which is why we’re always pushing the importance of the Academy’s Shopping List Pricing system. 

But there are so many nuances to the way you can reconcile your accounts.

For example, you’ll need to make sure your “owner’s drawings” are an expense account, NOT a liability or equity so you can see the impact in your spreadsheet.

You’ll need to talk to your accountant about that, because it isn’t technically correct for tax purposes.

The truth is, profit and loss is more complex than most of us realise - there’s so much more to exploding your profit than just finding more work. 

As you grow, it actually becomes more difficult to measure your success if you don’t have good systems in place.

Don’t be the hamster on the wheel moving its little legs really quickly and getting nowhere - Get your P/L on point!