Last week we discussed knowing where you stand financially, whether you are making money, losing money, or breaking even.
What now?
If you’re making money . . .
If you’re making the recommended 8% minimum net profit, you are probably doing most things right. What else could you do?
Most important, realize that things can change quickly in this business. If you were in business in the United States in September of 2001, you know what I mean. For many businesses, the phone stopped ringing and it was months before clients started to call again. Businesses with an advertising program in place recovered more quickly than those that worked by referral only. Pick your ideal client (and all their neighbors) and advertise so that your name is in front of them year around.
Watch that your subs, suppliers and even your own employees don’t become sloppy with their work habits or the way they treat your clients. Diligently focus on customer service, all the time. Return ALL your phone calls and keep all your appointments and on time.
Watch your numbers. Keep expenses in line with your budget. More business coming in does not mean you should go out and buy new vehicles, new equipment and hire more people. Watch your cellphone expenses. Management and job superintendents should use their phones for company business only. Employees should not be allowed to use a cellphone, whether texting or calling, during normal work hours.
Treat each day and each thing you look at just like you would if you were losing money.
If you’re breaking even . . .
You obviously need to make some corrections. In almost all cases, fine-tuning can help get profits up to the minimum of 8%.
One of the first things you need to look at are the number of leads coming into your company each month. Ideally, you should have eighteen (18) leads for each salesperson that your company has. Eighteen leads mean the salesperson is working.
In addition, the sales to leads ratio should be at least one sale in four leads for remodeling or specialty work and one in ten to fourteen leads for new home construction. If you do better, great (as long as they are profitable sales. Anyone can give work away.) If your sales to leads ratio is lower, that’s a warning flag that improvements in sales technique need to be made. Lack of profitable sales is high on the list of reasons why construction related companies go out of this business.
Check your number of employees to your dollar volume sold, built and collected. Total sales mean nothing if it isn’t built and collected. Chapter 6 of Markup & Profit Revisited (“Build the Work Profitably”) discusses the ratio of employees to dollar volume built for specialty contractors, remodeling contractors and new home builders. If production is too low for the number of employees, you must either increase sales or reduce the number of employees. There is no third option if you wish to stay in business.
This is one of those deadly items that can cause problems quickly. If you don’t pay attention, you will soon find yourself with little or no cash because most of the money in the door is used to pay employees.
Another check you can perform is the dollars of work produced per man-hour worked. This gives you the ability to check production from month to month and from job to job. Over time, this will also allow you to see who is producing and who is just putting in time. The formula is: Total sales divided by total man hours worked.
If you’re losing money . . .
The changes needed for a company losing money are normally small. It doesn’t take big problems for a company to lose money. Likewise, it seldom takes a major change in the way you’re doing business to turn things around. As I like to tell our coaching clients, I seldom have to fire an owner to get better results for his or her company.
Here are some things to check immediately if you are in the red.
As above, read Chapter 6 in Markup & Profit Revisited to discover if your volume sold, built and collected is sufficient for the number of employees in your business. This is a big one.
Each month we update our To-Do list. You’ll note that I often say, “Check that _____matches your company goals”. These goals should be set at the end of each year, and then it’s up to you to check these items regularly to be sure you stay on target.
Almost always when we get involved with a company that’s losing money, the owner hasn’t set his or her company goals for the year. In my opinion, goal setting isn’t an option. This is as important an item as you will ever have on your list of things to do.
Your goals should be set each year over a six-week period from November 15 to December 31. If you didn’t do that last year, start now for the rest of 2014, and start again on November 15 for 2015. Then, and this is most important, get busy and make those goals happen. Remember, if it is going to be, it is up to thee.
Don’t make the mistake of trying to set goals over a weekend. Take a full six weeks and really study your business. Take it apart, see what is needed, and give yourself time to think about what you want and where your business is going. Put some effort into it. (For more details – Year End Planning Part 1 and Year End Planning Part 2.)
If you’re losing money, you might consider our coaching services. We turn around over 90% of the companies that come to us for help. One of the things in our bag of tricks is the “Red Paper” we provide coaching clients. The Red Paper, if followed, will get creditors off your back and let you get back to the business of running your business instead of dealing with creditors who are hounding you for money.
And finally, a few things to keep your eye on . . .
Regularly review your markup. If there is any question about how you are doing financially, check your markup once each quarter. But don’t change your markup based on the previous quarter’s numbers. Use a full year’s worth of numbers to calculate the markup you need.
The one thing I can tell you is that you should not use margins to calculate your sales price. The chances of getting confused and making a costly mistake is too great. I recently read an article about margins and how they can help you. The author was convinced it’s all simple and easy, but the article made the issue so confusing I could hardly follow him. The best advice I can give is to multiply your job costs by your markup to arrive at your sales price. This is the quickest and simplest math. When you use margins, sooner than later you will make a mathematical error. Guess who gets to eat that mistake?
Finally, the owner needs to stay focused on three jobs. The first is owning and running the company. This should occupy about 50% of the owner’s time.
The second job is selling, schmoozing, and pressing the flesh. Eyeball to eyeball with potential clients is the place to be, not in the office in front of your computer or sitting in your vehicle waiting for the phone to ring.
The third job is to delegate. You make a living working on jobs, but you will never make any money. The owner should delegate, delegate and delegate. Then be sure that the job assigned gets done on a pre-agreed time schedule. Hold your people accountable for their assignments, but don’t do their thinking for them. If they ask you a question on how to do something, tell them, “take care of it”. If they make a mistake, do a quick review of what should be done next time and move on. Don’t think for your employees. The idea that “nobody can do it as well as me” is costing you money. Delegate and move on.
If you’re making money, that’s the way it should be. Keep on! If you’re breaking even, make a few changes and start being profitable. And if you’re losing money, it’s possible to turn things around, but it’s far easier today than it will be tomorrow when you’re only deeper in debt.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations as needed.