Business Management and Financial Responsibility
The two questions the exam keeps asking
Nearly every business-management item reduces to: can this contractor fund the work until the money comes back in, and can the contractor price the work so something is left over?
Working capital = current assets − current liabilities. It measures the cash cushion for payroll, materials, and retainage during a job. Net worth = total assets − total liabilities; it measures long-term financial strength. Nevada ties the monetary limit on a license to demonstrated financial capacity, so the two ideas travel together: a contractor with thin working capital but heavy equipment and low debt can look strong on net worth yet starve on a job.
Profit is not cash. A profitable job can sink a contractor who spends on labor and materials in month one and collects in month four. Build a cash-flow schedule next to the budget: bill early, track retainage (commonly 5–10% held until completion), and never use one project's funds to pay another - commingling and diversion of construction funds are disciplinary matters.
Markup versus margin is the classic trap. Markup is added to cost; margin is a percentage of the selling price. A 20% markup on $100,000 of cost gives $120,000, a 16.7% margin. To hit a target margin, divide: price = cost ÷ (1 − margin).
Worked example: overhead runs $240,000/yr and you want 8% net profit. At a 25% gross margin, break-even revenue = $240,000 ÷ 0.25 = $960,000. To also clear 8% profit: $240,000 ÷ (0.25 − 0.08) ≈ $1,412,000 of volume.
Also know overhead versus direct job cost, contingency, insurance and bonding cost, and the three statements: balance sheet, income statement, cash flow.