enough money? Then learn to think about the bottom line on every job you quote
Contractors who are overly focused on increasing their sales without regard to their costs are like hockey coaches who put five forwards on the ice at all times. Their team might score 10 goals on the night and lose 12-10. In this monthâ€™s Contractor U, letâ€™s look at the difference between being successful on the top line (your offence, as it were) and the bottom line (which is generated by defence, or cost control). By Mike Draper
irst of all, let’s define top line and bottom line. Your top line is the total revenue of your company and refers to the number at the “top” of your income statement. It represents the amount of work performed that you invoiced your clients for in a given period. It is not profit; it is revenue. The bottom line number is at the “bottom” of your income statement and represents the amount of net profit or loss your company has for the given period. It is what remains of your income after your expenses, including overhead, have been accounted for. While the primary concern of most small businesses is their bottom lines, some companies do indeed strive to increase their top line revenues without too much concern about the bottom line. Companies that think this way are typically on a rapid growth path and growing revenue is their top priority. You may be wondering why a company would focus so much on revenue instead of profit, but there are many possible reasons. They might be trying to take market share away from their competitors and will do so at almost any cost. They may be reinvesting in the company to generate even larger profits later on. On the flip side is the company focused primarily on profit without too much concern for revenue. This type of company is looking to make as much money as they can. Lastly, there is the company that wants to do a balanced combination of growth and profit. They want to grow, but they want to do it profitably. Which type of company are you? From my perspective, the only reason to be in business is to make a profit.
Not making the money you should In our industry, I constantly meet owners of
contracting firms who are so focused on increasing revenues that they believe their revenue growth will take care of all of their costs. It rarely works out that way. The net result is that too many of these owneroperators don’t make the money they want or should make. They do lots of work and have good revenue numbers, but they don’t have enough profit. At end of the year they say, “I didn’t make enough money.” And they tend to say this year after year! The reality is that contractors need to make sufficient profit on each job so they can cover, not only their direct job costs but, all of the overheads associated with running a construction business. To do so, each job has to be profitable. The practice of taking jobs just to stay busy is a mistake. Taking unprofitable work so you can keep your staff working is also a mistake. Without profit on each job, it is not worth doing the work. Doing work for the sake of working and not making money is crazy. Having said that, why does this happen so often? There is so much pricing pressure in the industry and so much pressure to keep employees working that contractors take the work even if it is not going to add anything to the bottom line. I am sure you are thinking, “I can’t charge more than I do because I won’t win any work.” While it may be true that you won’t win as much work, it isn’t true that you lose more money from raising your prices. Let’s look at some examples.
Increasing your prices by 10 per cent If you currently have a 20 per cent gross margin and you increase your price by 10 per cent, you will make 50 per cent more gross profit. That’s right! A 50 per cent increase in gross profit from a 10 per cent increase in price. By the way, remember that gross
profit is revenue less job costs, before subtracting Often, I hear contractors say they have increased overhead expenses. their sales, but their profits don’t climb at the same Now if you feel that you can’t charge any more, pace. They take on more work, but the increased there are two things to keep in mind. If you increase volume creates inefficiencies in the business. More your price you might not win as much work. Since mistakes are made now that the business owner is not the work is at a higher profit margin, when you do on site as much, trades and employees take too long win work, you will need less of it to make the same to do their work, not enough time is spent on planning, profit. Less work for the same money is a good etc. All of this translates into increased costs and thing. In the example above, less profit. you will make the same gross As we said at the top of this article, focusing on just profit while doing 50 per cent increasing sales is like building less work. That’s a no brainer. a hockey team based on goal We at Renovantage have been Without profit on scorers. The team scores lots of encouraging our clients to raise each job, it is not goals but has no defense and is their prices by 10 per cent for guaranteed to lose. Lose enough, over 10 years and not one has worth doing the work. and you are going to be out of lost even close to half of their the league (out of business, that work! In fact, most of them Doing work for the is) for good. improved their sales processes
at the same time and ended up with increased sales.
Decrease your costs 10 per cent
sake of working and not making money
better trades who have developed an efficient model to do quality work at very competitive rates. They have figured out how to run their own business better and as a result can do the work for less money. Ultimately, combining a price increase with reduced costs will help to create the largest improvement in your gross margin.
For contractors, the best way to grow is by focusing on running the business more efficiently. Take out all of the unnecessary expenses and time wasting activities. A big time waster is running to the local building supply store many times a day. Plan the needs of the job well in advance and get more material on site at one time. Do your best to think ahead for what you will need and order it in advance so that you can order it from lower cost suppliers. Buying materials at the last minute from the closest lumber yard costs more. You will spend less time running around picking up material and you will be buying at better pricing. Both of these outcomes will help increase your profit on the job. This one change in the way you operate
The other option, instead of increasing your price by 10 per cent, is to reduce your costs by 10 per cent. You need to do a better job in buying product, run your projects more effectively to reduce the labour portion of your work. Reducing the labour portion doesn’t mean going back and demanding a lower price. it means working with
Running more efficiently
can have a very significant effect on your overall profit. It all comes back to the carpenter’s saying, “Measure twice, cut once.” Spend more time planning the job and the materials needed and you will spend less time running back and forth to the store. Sometimes you just have to slow down to speed up.
some time and some hard work. Don’t make it worse by taking on non-profitable work! You are not in the finance business and shouldn’t be financing your client’s project. There is really no reason for contractors to have cash flow problems. Make sure you set up your milestone payments so that you get paid before you have to pay out. It’s that simple! Cash flow Other options are to borrow some money, if you Another area of inefficiency can, or go to your suppliers has to do with cash flow. When and trades and negotiate better cash flow is tight, contractors terms. If you are upfront about are always juggling who they what they can expect from you, are going to pay, which phone you just might find that many If you currently call they will answer, who they are okay with it. The worst thing have a 20 per cent are going to call back and to do is to just ignore them, as which is the next urgent item they won’t go away and the gross margin and that needs to be ordered. The burden will still rest on your you increase your amount of time some contractors shoulders. Even offer a postprice by 10 per cent, spend dealing with cash flow dated cheque if shortages is enormous. Trying that helps. you will make 50 to keep all of this in one’s head Focusing on profitable per cent more gross is next to impossible. Trying to business can be implemented profit. That’s right! remember who you owe, when, immediately but it should what, how much and from also be treated as a long-term whom you have money coming change in your business model. in takes an enormous amount Small, incremental changes, of thought and energy. This is aggregated over time will time and energy that could be better spent focused on produce the best results. Think of these changes as winning profitable renovation work. a marathon and not a sprint. It takes time for change If you were to spend five hours a week juggling like this to show results, but if you don’t start now you cash flow (that’s low for many contractors!), then are just pushing the results further into the future. you have five hours less selling time. In a year, that So make the time to review the strategies in this corresponds to over 260 hours – or six weeks of article and then force yourself to implement them extra selling time – that is lost. With six weeks more in your company. In the end, it is all about the time to secure better work, your business will look bottom line! cc totally different. Mike Draper is a business coach for Renovantage Since so much time is lost managing cash flow, (www.renovantage.com) and a frequent contributor it is important to get it under control. This may take to Canadian Contractor.