DreamMaker NewsMakers
The Numbers Game
May 2007
Doug Dwyer, Contributing Editor
Profesional Remodeler Magazine
There is an old saying, “numbers don’t lie.” This is true, but they can also be very confusing. Why is that?
One of the major reasons is that most financial programs are set up to accommodate IRS standards. What you and I need is a program that helps us to run a more effective and efficient business—a business that pays us well and produces a double-digit net profit.
A few key items to understand are:
· How should you structure your P&L?
· Why do a post-job profitability analysis?
· What is the quickest way to become the financial expert that you need to be?
· How will your annual sales volume and gross profit margin (GPM) affect your remodeling business growth?
When you estimate a job, you have the sale price and your direct costs into that job (i.e. material, labor and subcontractor costs). The difference between the two is your gross profit. With that number, you can calculate your gross profit margin.
My suggestion is to keep your P&L fairly simple. Think of the top section of your P&L like a conglomeration of jobs completed in a certain period of time (i.e. a month, quarter or year). The middle section should be all of the supporting costs (overhead) to run your company. Then, the bottom is what’s leftover (pre-tax net profit) after subtracting your overhead cost from your gross profit dollars. By structuring and thinking about your P&L in these terms, you have a much more useful tool. For example, if you look at your gross profit margin percentage and it is 8% lower than what you’ve been selling your jobs, you know you have a problem somewhere.
This brings up the need to do post-job profitability analysis. To diagnose where the problem(s) is in your business, we recommend doing these analyses for each and every job. I have worked with many companies that never realized how or why they had so much slippage in their gross profit margin. When digging in, they realized it was a myriad of reasons, including: 1.) No set pricing system, 2.) Missed items in the estimate, 3.) Labor hours underestimated, 4.) Not signing a subcontractor agreement on each job, resulting in budget overages, 5.) Incorrect orders, 6.) Poor coordination of production team and materials, 7.) Poor drawing, with a lack of detail, causing rework, 8.) Manufacturer mistakes, 9.) Not using change orders and failure to collect money as changes were made.
Just a couple of these issues can hurt, and if you have all of them, they could put you out of business or, at minimum, consume a lot of your personal savings.
The main reason for most of these issues is the lack of systems, knowledge, and people trained to use the systems. Like having a major bodily injury, it is advisable to seek immediate professional help for your business. Whether your company is healthy or sick, the quickest way to become an expert in your field is to hire a top-notch accounting or business coach.
Annual sales volume and/or gross profit margin in and of themselves are not a cure-all in a remodeling business. Rather, a blend of the two makes it possible to have strong income and quality of life.
For example, I worked with a remodeler who did design/build work as a general contractor. His annual sales were $1.6 million. He was making good personal income, but was wearing the general manager, production manager and salesperson hats. His quality of life was fair—not great—and his business stability was totally dependent on him. At $1.6 million in volume, it should be a choice to wear that many hats, not mandatory for the business to survive. What’s wrong with this picture? In this case, his gross profit margin was not high enough to afford to replace himself in one or more of his roles. So volume is not the cure for him, but rather selling jobs at a higher gross profit margin is.
But, the opposite can be true. I know of a remodeler with a 45-50% gross profit margin and sales of approximately $500k a year, serving in the same role as the $1.6 million company. The challenge with this scenario is this owner does not produce enough volume to hire a full time person to replace himself in one or more of his roles. For example, at this volume he doesn’t need a full time production manager.
Volume or margin as a single solution can be a trap, but the combination of the two makes a winning team.
Know your numbers and how they affect your future as a business owner!
