There is a lot of misinformation about flipping real estate on the internet and on television. I’m mostly shocked by the lack of detailed information related to the entire cost of the project and the adjusted sales price. I have yet to read a single article that goes into the details of the business dynamics of flipping houses.
Accounting Principles – Profit and Loss
Learning to understand the basic two financial reports in business are essential for the new business entrepreneur. The profit and loss statement (income statement) is one of the fundamental reports used in business.
A well organized and understandable restaurant profit and loss statement can provide infinite value to a restaurant owner. The best format to use allows the owner to understand his prime costs, total variable costs and the required contribution number necessary to cover fixed costs and desired profit.
Service related businesses require a different format than the traditional profit and loss statement AKA the income statement. The traditional profit and loss focuses on sales of products and a corresponding cost of goods sold section to help the reader evaluate the gross margin. But in service, the owner needs a profit and loss statement formatted to key in on overall productivity and costs of that productivity.
Every construction project has costs beyond the direct costs and the contractor wants to earn a profit. To cover these costs he must have an appropriate markup. The contractor must give consideration to many variables and circumstances to calculate the best markup for a construction project. To determine the best markup percentage on costs, the contractor should consider his indirect costs, overhead, taxes, and final profit desired.
For any company, profit is based on the risk reward concept. With construction, what should be the profit (reward) given the risk? What is a reasonable expectation given the industry and the particular business? There is no single correct answer. The construction industry is divided into several significant branches. This article is focused on the residential contractor.
From the new home builder to the re-modeler, a reasonable profit given the risk should be no less than 9% AND this is net after a reasonable salary to the owner for his management role. This is the take home or actual bottom line profit; the amount after taxes. How do you derive such a figure? How do you determine the markup on the construction project to end up with this profit?
Simply stated, accounting is the measurement of economic activity. Its primary principle is to report information to the user so that (s)he can make informed decisions. The primary reporting format is in the form of dollars. There are two important reports used by pretty much 99% of all business operations to determine the status of the business operation. These are the income statement and the balance sheet.