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Construction Programs & Results Inc

We Like to See The Good Guys Win!

Year-End Planning, Part 2

by Michael Stone

Year-End Planning Continued

Our last article talked about reviewing the current year. We also talked about your volume projections for the upcoming year, and started projecting overhead. We're going to pick this up by continuing an indepth look at your overhead budget for the coming year.

Overhead Budgeting

1. Staff

  • What is your budget for salaries for office staff for next year?
  • Are classes or seminars available for your office staff to help them do a better job?
  • Do you have a plan in place to take key people to at least one convention this year?
  • Do you have a plan in place to purchase (and read) at least one new book per month?
  • Is there someone you can bring in, a coach, a consultant, a trainer that can provide training for you or your staff? Do you have problems or issues that warrant that? (How do you pick a coach or consultant? Check this page for an outline of what to look for.)
  • Have you scheduled your year-end review for each member of your staff, which should include reading and signing your employee manual? If you don't have an employee manual, here is a good place to start - Employee Manual

This review should include an analysis of their performance this year as discussed in our last article. Ask yourself this question for each employee: Do I need this person in this job? Are they doing the job they have been hired for and I am paying them to do? Should I combine two or more jobs, or should I hire another to share their workload?

2. Paperwork

  • What is your budget for paperwork for next year?
  • Does your contract need updating? (Very few don't)
  • Do you have pre-printed change work order forms, or are you using other forms?
  • Do you have pre-printed Right of Rescission forms?
  • Is your company Employee Manual up to date, a copy on file for every employee? Has everyone signed the manual? This should be done by the end of January at the latest.
  • Is your sub-contractor manual up to date? Are you using a sub-contractor agreement manual with a separate form for each job? Are all your subs required to sign the agreement before they are allowed onto any job site? If you don't have a sub-contractor agreement, start here.
  • Do you have a standard checklist in place for your office manager to check that your subs license, bond and insurance are always up to date?
  • Does your company provide or help with obtaining financing for your customers? Do you have a checklist to cover every step that needs to be taken to obtain the financing needed for your work? Remember, obtaining financing right now is getting a bit easier, but it's still tough and all the indicators are that it will continue to be for the next year, and perhaps a bit longer. Lenders are still being cautious with their money.

3. Tools & Equipment

  • Have someone compile a complete list of all tools and equipment owned by the company, complete with serial numbers, make, model and instruction books. Their condition, any expected repairs and the cost of those repairs should be noted. You should also inventory all fasteners, saw blades, and any other parts and/or pieces that are used with your tools or equipment.
  • Who is that tool assigned to?
  • What needs to be repaired?
  • What needs to be replaced?
  • Did you spend more this year to rent equipment than you would have spent purchasing the same equipment?
  • Do you have equipment in storage that should be sold? If it has enough dust that you can spell your name on it, maybe it is time to sell that critter.
  • What is your budget for tools and equipment for next year?
  • What will be your maintenance cost for next year for tools and equipment?

4. Vehicles

  • Are all of your vehicle licenses up to date? Do you have all the VIN #s and license plate numbers written down and easily accessible? Should you sell one or more of your vehicles that are sitting and not being used? Are all your trailers legal, including lights, license and weight postings? What do the tires on your trailers look like?
  • Did you pay more this year for moving equipment to different job sites than you would have spent if you had a trailer for that equipment?
  • What vehicle(s) needs to be repaired?
  • What needs to be replaced?
  • Do you have a written maintenance schedule in place for each vehicle?
  • Do you have each vehicle assigned to one person to be sure that maintenance is done on that vehicle on a regular basis?

5. Inventory

Plain and simple, you should not have any inventory. If you have leftovers from a job, take them back to the supplier and pay the restock fee. It is far cheaper than maintaining a storage facility. A restocking fee, by the way, should always be included in your estimate if you are not absolutely sure of the materials needed.

6. Education for next year

What educational programs do you need for yourself and your staff? After your review of the current year, you should know if you or your staff need outside instruction on how to do things more efficiently and/or more profitably.

As stated above under "Staff", plan on adding at least one new book to the company library each month. Place someone in charge of the library, checking books in and out so they don't wander away permanently.

Plan on attending at least one convention in the next year. You should try to take your key people with you. This is not a fun and games trip, this is an educational trip. You and your staff should take advantage of every class available. Play after the convention.

7. Associations

Are you involved with an association? If you are, it is time to ask some tough questions. It is all too easy to get caught up in association work and involvement at the expense of both your business and your family.

If you are on the Board of Directors, is it taking time away from your business that is costing you money? In most cases it will. You need to look long and hard at your level of involvement and weigh the value of your time and money invested compared to the return you are getting. Some folks will tell you that you need to give something back to the industry. That's true, but not at the expense of your own family or business. All too often business owners work through the chairs of their association while their business goes from bad to worse to bankrupt. Let someone else take that trip.

Associations are generally good for our business. There is little question on that issue. They provide political clout to keep bureaucrats and elected people focused on what is important to us. They provide marketing that, done correctly, can be a boost for your business. And the networking available, the ability to spend time with others who fight the same battles you fight, is invaluable. But make darned sure that your involvement stays balanced with the discretionary time you have available from your business and family. Family first, then business, and then maybe your association.

8. Other Expenses

Look through your P&L and review the other expenses in your overhead. Are they reasonable? Have you recently investigated other options for insurance, telephone and rent? It never hurts to take a few minutes to ask questions, maybe talk with some new providers.

Pulling It Together

Once you have completed your evaluation and you know both the good and the bad about your year's performance this year, it is time to plan the changes needed. To make that plan, you should look at each of these items individually. Like the parts of a bridge, left individually, they are a very weighty pile. Assembled and in order, they will carry you to any destination.

The final step in your year-end review is to look at each of the following items in depth.

Advertising

By now, you should have a real good idea of what your business did this year. What you did right, and maybe what you could do better this next year. Remember, you didn't make mistakes; you just gave yourself the opportunity to make improvements next year. It helps to have something to look forward to, right?

Now we're going to make things happen. In our last newsletter, we used an example of setting an annual projected volume of $855,000. You need to set your own volume – it might be 10 times that or half as much. Use figures that are correct for your business and remember we are just using numbers to give an example.

How will you get $855,000 in the door next year? Look back this year to find your average sale price. Let's say that this year our revenue will be about $792,000. By the end of the year we expect to sell, build and collect on 40 jobs with an average sales price of $19,800. (Be careful when calculating your average. If you sell primarily large jobs with a few small ones, throw out the small ones when calculating your average sales price. You want the average to be as close to average as you can get.) To reach our projection of $855,000 next year, we'll either have to sell more jobs, or sell larger jobs. What do you think you can do? It's your call. For our example, we'll try for more jobs. Next year, to reach $855,000 in volume with an average sales price of $19,800, we'll need to sell 43 jobs.

You also know, looking at this year, your sale to leads ratio. Here's the math:

# Leads Taken  divided by  # Sales Made = 1 in ___.____ (two digits to the right of the decimal)

As an aside, here is a guideline on your sales to leads ratio. If you are selling:
1 in 1.1 to 1 in 3.0 – You're probably selling too cheap – check your markup
1 in 3.5 to 1 in 4.5 – That's a good ratio, try to stay in the 1 in 3.5 -4.0 range
1 in 4.5 to 1 in 6.0 – You need to work on selling skills, immediately
1 in 6.0+ – Either improve or find a new salesperson. You're wasting leads.

If you know that this year you sold about 1 in 4 leads, that means you'll need 172 leads next year. For safety's sake, add about 25 percent to cover the possibility of more "tire kickers", "I want a square foot price", or "I am just looking for the cheapest price" calls. When the economy is down you can expect more calls of this nature. 172 plus 25 percent means you need 215 leads.

In your review of this year, you found that your average lead cost you $58. So next year to generate 235 leads, you can reasonably expect to spend 215 x $58, or $12,470 to get the leads in the door.

Where To Spend Your Advertising Dollars?

Part of your review of this year was to:

  • List all of your various lead sources.
  • List the leads and sales in each category.
  • Then calculate the cost of each lead in each category.

That tells you where the best place is to spend the initial investment of $12,470. But since $12,455 is far short of a normal budgeted 3-5% for advertising, let's enhance the number of leads that come in from each source. If you know that your web page generated half your leads last year, it would be smart to enhance your web site so you get the maximum advertising value from that page. We have found that over the last year, more and more companies have focused energy on improving their websites. The buying public is moving away from printed ads and going to the Internet when it is time to buy, so you need a positive presence there. That means a quality website.

If you do kitchens and baths, why not have a website for each? Can you add testimonials or pictures? Have you thought about having an Ugly Kitchen or Ugly Bathroom contest on your site? How about the Dirtiest Gutter contest? Worst plumbing nightmare? Those dumb contests work, and some times they work surprisingly well. Whatever you do, make sure you are including videos on your web site.

For some, email marketing and social media are difficult to understand and work, but the results can be great. If you need to, hire an expert to help you through it. We've recently become acquainted with Tess Wittler, a copywriter and social media expert focused on the construction industry. (www.tesswittler.com).

Focus your money on what has worked before, but always be open to new technology. Check your results monthly to see the results and adjust your advertising as needed.

Let me add - if you are not getting the type of leads you want, or if you are getting leads from clients whose only focus is price, you are advertising in the wrong place. This also happens when you work by referral only - you end up with many leads that are a waste of your time. This is a new year and we need to start thinking creatively.

Markup

Check your markup on a regular basis to be sure you are charging the correct amount for overhead and profit. If you don't charge enough for the work you are doing or the service you provide, you won't be around long. (Make life easier, use the Markup Calculator Software.)

You don't get a second chance when it comes to pricing your jobs. No one will volunteer to pay the bills that accumulate if you don't charge a fair price for your work. So do it right.

The markup for most remodeling companies is between 1.50 and 1.70. The markup for specialty contractors is usually between 1.35 to 1.50. The markup for new home construction is usually 1.26 to 1.30 and up. But it's critical that you calculate your markup based on your numbers. If you are outside the range, that's okay, as long as your numbers were calculated correctly.

Contracts & CWO's

Now is the best time to review any problems with your contract or your change work order forms. Incomplete or unclear contract language, and incomplete or non-existent change work orders are two of the top three reasons that contractors go out of business. Did all your jobs this year have signed and completed Change Work Orders? Were you paid for all changes when the CWO's were signed? Do your employees know the proper procedure to handle a change work order, and is your procedure outlined in your contracts so your clients know what will happen if a change is requested? And, while we are on that subject, does your employee manual clearly spell out for your employees the company policy on change work orders and what the employee responsibilities are regarding any changes on jobs they are working on?

Our Fast Track Proposal Writing software has been designed and built to help you write good solid contracts that will keep you out of trouble, get you paid on time and help you make a good profit on each job you do. Only the uneducated or the foolhardy try to conduct business working with one or two page contracts (unless you are doing handyman work). Most important, be sure your attorney okays the contract language you use before you start using it with your clients.

O.C.R.A.

You need a forced savings account to CYA (Cover Your Assets) on those unexpected expenses that march through your doors on occasion. Set aside between 1 percent and 4 percent of every dollar in the door for your Operating Capitol Reserve Account – put it in your budget. Let's not make any more excuses about why you haven't established and put the OCRA in place. It can be and has been the saving grace for many companies over the past few years. If you don't have one, today is a very good day to get one started.

Business Plan

You need a business plan. The exercise we are walking through is a one-year plan, but you also need a statement of why you are in business and how you operate, with long-term goals and how you plan to reach them. This plan could be handed to anyone who wants to know how you run your business. More importantly, when the going gets tough, it will remind you why you are in business and how you want to conduct your business. A well-written business plan helps to keep you focused.

Writing a business plan can be just as difficult or as easy as you wish to make it. We strongly recommend that you get a good software program to help you write your new business plan. The best software we have found is available at Business Plan Software, check it out here.

Employees

We talked about evaluating your employees, this needs to include an annual review of each employee and the officers of your company. Remember you need to document everything you talk about and fill out any forms that apply to each interview.

When you consider employees, look at the effort you need to expend to get them to do their job correctly. Can you give them a task or project, explain what you want done, and turn them loose knowing that the end result will be what you wanted? Or do you have to deal with a lack of initiative, progress and a result that is far from what you wanted. It doesn’t take much to classify most folks, just a couple of thoughts about the last two or three projects you gave them and you probably have them pegged fairly well.

As you analyze the company performance over the last year and set your goals for next, how does each of your people fit into your plans? If one or more of your employees is high maintenance, maybe it is time to give them a transfer to your competition. There are plenty of good people out there on the unemployed roster who would love to have a good job. If you have good people on board, be thankful and treat them well.

If you have an employee manual (and if you have employees you need an employee manual), review it, make changes as necessary and provide each employee with a new copy. Make sure they sign the revised employment agreement that applies to the manual.

This would also be a good time to have the key people in your organization evaluate your performance. You must guarantee them that they're bullet proof when they do this, or you won't get an honest appraisal. If you do have your employees appraise your performance, say thank you and incorporate needed changes without any comments or complaints. No excuses, no rationalizing, just listen and make the changes.

Financial Check up for Your Company

Just as you would schedule your vehicles and equipment for regular maintenance, scheduling a financial check up for your company is a sound idea.

Please keep in mind that almost all financial problems of any construction company show warning signs well in advance. Ignore them at your own peril.

If you are new in business or have been in business less than two years, check your financial position every other month at least. After that you should have the experience to check things quarterly and make adjustments as needed.

The key issue here is to put the financial checkup in writing, with check lists and a definite schedule, then make darned sure you do it. If you assign parts of this task to employees, make sure they do their part as well. No excuses, no stories, no procrastination.

"A long habit of not thinking a thing wrong, gives it a superficial appearance of being right."
- Thomas Paine

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