by Michael Stone
Get Started – The Past
We have a ten part series on our blog titled "Steps to Positive Cash Flow" (www.markupandprofit.com/blog/). A common thread is knowing where things stand. Are sales on track with your projections? Is your overhead spending within budget? Where are you?
So, let's start with what you know about this year. This applies to any type of construction-related business, it doesn't matter if you are a general contractor or a specialty contractor, building new homes or remodeling, residential or commercial. Adapt as needed, these questions apply to every construction-related business.
1. Describe your business
- What exactly did you do this year?
- Is that work in line with what you wanted to do?
- The most important question of all, what kind of jobs did you do that brought in the most profit? Call this your best percent of revenue. Don't guess – check your books and find out. You might be surprised.
Remember, this is not about what you like to do; it is about where you can make the most money. Write these answers down so you can see them and touch them, make them yours. We are building a reference point so don't get lax here, do it right.
2. Sales Performance
- How many leads did you get in?
- How many leads turned into actual appointments?
- How many jobs did you sell?
- What was your sales to leads ratio?
- List all of your lead sources.
- List the leads and sales in each category.
- If possible, calculate the cost of each lead in each category.
- If possible, calculate what each new customer cost you to obtain
3. Financial Performance
- How much business will be sold, built and collected by December 31?
- What will be your net profit? Gross Profit?
- What will be the total owner's compensation?
- Did you pay yourself a regular salary for owning and running your business?
- What was the average sale price?
- What markup (or gross margin) did you use?
- Did you use just one markup or different markups on different jobs? If you used different markups, what was the rationale?
- How close did your estimates come to your actual job costs?
- If your estimates aren't close to actual job costs, what can you do to improve them?
Some companies have cut way back on employees over the last 3 – 4 years. Most are now down to the bare minimum necessary to get the job done, which makes this next section even more important.
- Who are your employees?
- What are their skills?
- What is their record of on time performance both showing up for work and getting jobs done?
- List the good stuff they did and any problems you had with each employee.
- If you had a problem, did you come up with a solution and implement it? Did it work?
- Do you have a program in place for cross training employees?
- Are any of your employees willing to be cross-trained?
- Are any of your employees willing to cross train others?
- Do you have deadwood on staff and what are your plans to resolve that issue?
- Who can you train to cover for or replace you? You should have someone in place who can run your company if you need a vacation or if you are unable to work for a time. Begin planning who could handle this, and how they can be trained.
- Do you have an employee manual? (If not, take a look at ours.)
- How was your safety record this year?
- If there were safety problems, what has been done to resolve those problems?
- Did you hold regular safety meetings?
- Are you up-to-date on OSHA and state laws that pertain to lead paint, PCB's, Radon, asbestos and other related hazardous materials?
- What subs do you have an ongoing relationship with?
- What subs are on your "call first" list, and what subs are on your "don't use again" list?
- How dependable are your subs? What's their record of on-time performance both showing up for work and getting jobs done?
- What are the strengths and weaknesses of each sub?
- Do you have a signed agreement with each sub, a subcontractor manual? (If not, check out ours.) You must protect yourself and your company from guys who are just trying to collect a paycheck at your expense.
- What suppliers do you regularly use? What suppliers are on your "only if hell is freezing over" list?
- How is their customer service? Are the materials on time and as ordered, or are there regular issues with what's supplied?
- How did each job end this year? Are you on good terms with the building owner or was it a relief for both of you to end the job?
- If things went wrong, where did they go wrong? What have you done to be sure this stuff doesn't happen again? Is it in writing?
- What if anything have you done to make things right with the owner? Can you now ask them for a referral?
- Just as important, have you done a thorough recap of each problem job with the employees involved to prevent those problems from happening again?
- How much was spent on overhead last year? How does it compare to the budget that was set?
- What unexpected expenses were incurred?
- How large is the "miscellaneous" or "other" category on your P&L? Go back and look at each one, and properly categorize it if possible. Miscellaneous doesn't tell you anything, it should only include small, one-time expenditures, not to exceed $100.
9. Big Picture (from Tony Robbins)
- What are the key strengths of your business?
- Do you have a unique selling point that separates you from your competition?
- What are the weaknesses or challenges of your business? (Some of these you should have already listed from steps one through 8.)
Your planning process will begin with answering these questions. They help you look honestly at this year. Over the next few weeks, when you remember that problem you fixed on a job that could have been prevented, or the employee who went overboard to do the right thing, the supplier who delivered on time, every time, make a note of it and put it in a file. Because the odds are that if you sit down and try to remember everything at once, you'll forget most of it.
Now we're going to start making projections. This happens after you've looked at the past. It's difficult to set an overhead budget for the coming year unless you've projected your sales volume first, so we'll quickly set a sales volume projection.
1. Project Your Next Year Annual Volume
I have been through eight cycles in this business over the last fifty plus years. Think of a cycle like a roller coaster ride – there are the highs, with a great business climate and more business than anyone can handle, to the lows, with an economy in the toilet for all sorts of reasons, political and otherwise. Then it goes back to a high. Our economy seems to repeat itself every five to seven years. There is history in this business and if one pays attention, one can learn and profit from it.
I said last year that we are slowly working our way back up the long hill from the bottom. I still believe that's true. For planning purposes it might be safe to assume that next year will be better than this year. That's the "it has to get better because it can't get worse" point of view. Or a more conservative approach would be to assume next year would be the same as this year. Now, if you can beat your goals and projections, that's terrific. I'd tell you which approach to use, but my crystal ball is a bit foggy. You'll have to go with your gut, and make your own projection for next year based on what you know about your area, your business, and what you want to aim for.
As we have said in previous newsletters, many companies we work with have as much business as they can handle. That's because they have a solid marketing plan in place supported by a good budget for advertising and promotion. They work hard at and have built a good referral network. They make it a point of staying in front of the buying public. It is possible to make things happen but as the old saying goes, "If it is going to be, it is up to me."
If you aren't sure how to estimate how much business you'll do next year, use the Owner's compensation method. If you've been in business less than 5 years, determine exactly how much money you, as the owner, need (or want) to make next year and divide that number by 8 percent (.08). (If you have been in business five years or more and your business is relatively stable, use 10 percent or .10 instead.) The result is the volume of business you must sell, build and collect for the company to support your salary. That is one method of setting your sales goal for next year – as long as the result is realistic.
Let's say you've set a projected volume of $855,000. And you know that your overhead expenses for this year were 33.15 percent of total sales. Because the economy is tight and might continue that way, your focus needs to be on getting (or keeping) your company debt free, so you're going to force yourself to maintain the 33.15 percent overhead and not spend a penny more.
So your overhead budget for next year will be a total of $283,433 ($855,000 x .3315). From that, you will pay yourself $68,400 (8 percent of $855,000) and you're setting aside $42,750 (5 percent) for marketing. Subtract those two critical expenses off your overhead budget (owners salary and marketing), and you have $172,283 to pay the remaining overhead for the company.
How to spend it? Look at what you spent this year and the year before, and use that to determine where the $172,283 will be spent next year. Until you find out that next year will be the absolutely best sales year ever, plan to make it a "No New Toys" year. Maybe next year.
2. Plan Your Overhead Expenses
Below is a list of the things that should be resolved regarding overhead during this planning session. Using the stats you compiled from this year, it should be a relatively easy task.
As you work through your overhead, always have an attitude that says, "Where can we save", not "Where can we cut". The attitude of "Where can we save" means thoroughly analyzing the subject at hand. What is it, where and how is it used? Can we use it differently or in conjunction with other things? What can we do to reduce the cost of owning or operating the item? Can we extend its life, can we reduce the maintenance required for successful operation? Saving costs requires a long-term view and results in a thoughtful decision.
"Where can we cut?" is an emotional reaction. It means eliminating something completely so you can save money today, but it doesn't take the long-term view. Normally this happens after giving a subject little thought, it's a reaction that just wants to eliminate an expense. The two are as different as daylight and dark, and if you're prudent, you'll focus on saving rather than cutting.
I read a quote recently from one of my favorite guys, Brian Tracy. He said, "Decisiveness is a characteristic of high-performing men and women. Almost any decision is better than no decision at all." It's time to make some decisions.
- What is your budget for office equipment for next year?
- What new equipment do we need?
- What equipment needs to be repaired or replaced? What can you make work for one more year? Yes a new printer would be nice, but do you really need it?
- Is the traffic flow in your office good or do you need to rework or remodel your office next year for a more efficient operation?
- Does your office run smoothly? Can things be found that need to be found? (If your offices needs organizational help, you need "The Organized Contractor".)
- Do you have staff members that might function better in a different place in the office? And here is a question few owners want to face; do you have staff members that just need to be replaced or aren't needed at all? Chapter 6 of Markup and Profit, A Contractor’s Guide Revisited has a graph showing the relationship between employees and production; use it to determine if you have the correct number of employees for your sales volume.
- If you have a showroom, part of your planning this year needs to include what needs fixing, repairing, replacing of just plain finishing. If you have flooring that needs installation, put a date down to get it done. If cabinets need reworking or countertops need replaced, put it on the To-do list with a completion date. Customers are not impressed with half-done showrooms.
- Is your showroom a collection spot for almost anything that comes in the front door, or is it kept neat, clean and ready to help your customers make buying decisions?
- Are parking spaces in front of the office reserved for potential clients only? Staff, subs and suppliers should park away from the front entry so your customers have easy access to your front door.
- Is the signage on the front of your building warm and friendly, telling the passerby exactly what you do? Do you have a sign over the back door so your business is easy to find from the backside?
- What kind of condition is the exterior of your building in? Do you have windows and doors that need repair, paint that is peeling, roofing that won't keep the water out? Do you have piles of junk or building materials, old trailers or vehicles sitting around cluttering up the yard?
More in Planning, Part 2.
"By failing to prepare, you are preparing to fail." - Benjamin Franklin