I want to talk about patterns. As a business owner, do you know the ebb and flow of your business?
The hunt for new funding can put a business through many useful exercises. I recently put a lot of work into collating business records going back to the birth of my family’s business. I pulled together three years of records for our friendly neighborhood banker, but then I couldn’t turn off the data nerd in me. More hours than I want to admit later, I have a spreadsheet showing the long-term ebbs and flows of our business.
Of course, you don’t care what my operating expenses amounted to in March 2017 (and, if you do, they totaled $1,818.84). My bigger point is that, well, there’s a bigger point. If you run the financial show at your business, take out your profit and loss statement. Heck, most of you have business accounting software and can just run a report. Look at three years. Look at five. Look at that bigger point. What do you see?
I’ll tell you what I see hope you see: consistently growing total revenue. Some months, expenses may far outpace revenue. The overall picture, though, shows revenue climbing each year. That climbing revenue should amount to enough to make the hard work worth it.
I hope you also see steady or slightly falling operating expenses. My operating expenses seem to hover around 65-70% of gross revenue over time. Of course, a drilling or construction company may take an entirely different financial shape. Maybe your company runs around 80%. Maybe it’s 50%. Whatever your number, write it on a Post-It. Now take a look at this month’s operating expenses. As a percent of gross revenue, does the number come in higher or lower than what’s on the Post-It? Less, and you’ve steered in the right direction that month. More, and you know to course correct.
That percentage can also inform future work. Pencil out each job. Would expenses fall under that target percentage of expected revenue? Get those jobs.
Now, the bigger point of looking at years of financials comes when you can turn all that data into something useful that makes your life easier. Take the percentages of common operating expenses and start allocating your revenue by those percentages. (Don’t forget to allocate for capex, a crucial part of a drilling company’s financial picture, but a part not considered an “operating” expense.) If you know you spend a certain amount on consumables, for instance, budget for it. Budget for fuel. Budget for vehicle maintenance. Re-adjust percentages as needed each year. Know the ebb and flow of your business.
Now, if you regularly seek financing for big purchases like $1-million drill rigs, you already know a lot of this. You’ve agonized over your updated business plan, and cash flow and profit and loss statements. Bankers have a funny way of wanting to confirm you can pay their money back. But, if you just started your company or haven’t looked in a while, I recommend you acquaint yourself with your business’s financials. Talk to your accountant. (If you don’t have one as a business owner, stop reading now and find one.) Check your reports each month, quarter and year. Look for patterns. What do you see? Put those insights to work to make more profit, plan for that next rig or eventually afford to retire.
What do you think? Are you better with your hands than numbers? Or have you and your accountant designed the perfect profit machine? Send an email to email@example.com.
Stay safe out there, drillers.
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