Looking Back to Get Ahead

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Even successful remodelers should occasionally look back at the same time they're trying to peer into the future. The wealth of information that can be provided by examining a company's recent past should be mined for valuable tips that can be used to increase profit as the company moves forward. Even small adjustments can put more dollars into your pocket.

The diversity and scope of the remodeling business require a company owner to assess how the firm is doing unrelated to industry averages. Simply put: Are you making enough money? Are there ways to make more? Is your family protected from business mistakes that might lead to personal calamity? Is your company running as efficiently as possible? Do your employees and subcontractors know what you stand for? Are you personally satisfied?

A company owner should scrutinize a number of areas at least annually. These areas fall into several general categories:

Financial reporting
Some people collect data for the sake of collection. Others collect data for a purpose. With the widespread use of relatively inexpensive accounting software, no company owner should lack numbers. But which ones to examine and what they say make all the difference in the world.

The balance sheet: At least yearly, determine whether your company's net worth is increasing or decreasing. While a decreasing net worth might not spell trouble (especially if the owner has received more income), an increase is one sign the company is on the right path. In addition, a healthy balance sheet might present opportunities for growth or expansion, as this is one of the first financial reports examined by lending agencies. Remove old receivables unlikely to be paid, or write down equipment being carried on the books for greater than market value. A yearly examination is a good time to clean up a balance sheet.

Cash flow: If your company has had to use lines of credit throughout the year to pay its bills in a timely manner, it probably requires recapitalization. This might entail investing money back into the business, re-evaluating how jobs are billed to increase cash flow from customers or finding new lines of credit that might be less costly (i.e., have lower interest rates) than existing lines. Periods of negative cash flow might be expected when running a business, but every dollar saved from interest expenses drops to the bottom line as profit. Conversely, a company operating with a 35% gross profit margin requires $3 of sales to pay $1 in interest expenses.

Overhead: Regardless of how successful the previous year was, it can benefit management to review how company funds were spent. One significant area to examine is overhead structure.

When considering whether overhead dollars were spent wisely, make every attempt to determine whether each dollar was spent on profitable activity. If an overhead expense is found to be wasteful or unproductive, it's easy to justify its elimination. Perhaps more difficult to assess is whether a task that's necessary for the operation of a business might be accomplished cheaper elsewhere.

One case in point is payroll services. It's difficult for virtually any company to justify keeping that task in house. For a remodeling company whose bookkeeper still performs that task, it would be worthwhile (and potentially profitable) to calculate how much time is spent writing checks, completing tax forms and doing the myriad other tasks associated with paying employees. A relatively brief telephone call to a local payroll service should yield a comparable fee, resulting in valid information with which you can make an informed decision. This sequence should be followed for any other fixed or recurring expense in an attempt to reduce overhead.

There should be no sentiment in this task. Every overhead dollar saved drops right to the bottom line and is added to profit. If a remodeling company with $1 million in sales, for example, cuts its $300,000 in overhead expenses by 3%, it can add 1% to its profit percentage. A 1% addition to a company struggling to show a 5% net profit percentage yields a 20% increase in profit, all related to modest overhead cost savings.

Process management
Virtually every activity repeated on a regular basis should be systemized. Developing systems is not only efficient, but also can reduce errors and wasted expenses.

For example, does your company follow a checklist when prospective customers call? Does that checklist include not only information about the potential customer, the contemplated job and the prospect's budget, but also reminders on sending follow-up correspondence, referral thank-you notes and other relevant marketing material?

Does your company have a system before jobs are started or as estimates are prepared? A checklist for kitchen and bath remodels that includes blanks for every type of material that might be ordered and every measurement that might be necessary? Checklists for every other type of remodeling project your company has tackled more than once? Checklists to be followed when a job is estimated or for pre-construction walk-throughs? Checklists for carpenters to follow for material ordering to try to avoid those profit-sucking stops at the lumberyard?

Every company process, from production to accounting, should be critically examined with the intent of writing a procedure to avoid wasting time and your money. In turn, those procedures become part of a company manual to be passed on to all existing and new employees.

Job costing and profitability
At least once a year, review job costing for all completed jobs. Where does the company make the most money? Once that's determined, targeting the most profitable jobs should become priority one for all company marketing. Determining why other types of jobs are less profitable should include forensic auditing: What went wrong (e.g., how many extra stops at the lumberyard because of a lack of ordering systems), and how can it be fixed?

Determining job profitability should be examined from two perspectives. First, jobs should be examined in terms of percentages: Which jobs (e.g., bath remodels, add-a-levels, single-line replacements, et al.) had the highest gross profit percentage? Second, which jobs had the highest profit per hour worked? Thus, a one-day window replacement job might yield a low gross profit percentage, but the high cost of the materials might result in a higher profit per man-hour. That revelation might cause an owner to rethink the value of "small" jobs.

Insurance
While every remodeler knows how costly insurance is (especially for workers' compensation coverage), there are certain coverages that an owner should not avoid lest his family be put at risk.

First, be certain your company's agent has expertise in the building industry. An insurance professional with knowledge of the building industry is best equipped to understand where an owner is exposed and which coverage might be duplicative or wasteful. A competent agent should be able to provide a budget within which basic coverage should be provided to protect the firm as well as its owner(s).

Second, be certain everyone with even partial company ownership is adequately protected from risk. Remember, any action by an employee or subcontractor working on the company's behalf can result in a devastating lawsuit. Even if a litigant can't pierce the corporate veil and attack the owner's personal assets, an unsuccessful lawsuit still can bankrupt an otherwise successful company.

Satisfaction
Customers: Once a year, ask your customers how you and your company are doing. While you might not appreciate all the answers, the information will be worthwhile. From the anonymity of their kitchen table, customers might be more inclined to make critical comments than in person. And they might provide you with timely information about your company, its employees and its methods.

Customer satisfaction surveys also can be used to generate more business. First, surveys put your name in front of the people who trusted you to work in their home. They can remind them of other things they might want you to do. Second, customer satisfaction surveys also allow room (if you ask) for customers to list the names of friends, neighbors and relatives who might want your services. As almost anyone in sales knows, solid referrals are a great source of job leads.

Employees: At least once a year, remodelers should tell their employees how they are performing and what's expected of them during the next year. In turn, the employees should be asked how satisfied they are in their jobs and where they see themselves in five or 10 years. Then it's the owner's job to help the employees maximize their abilities. A satisfied employee is a great company asset, but a dissatisfied employee can cost you future sales and current profit.

Personal
Do you work for your company, or is your company working for you? Are you being compensated for all you do and all you know, or does your lead carpenter make more per hour worked than the boss? Are you burned out from 12 months of continuous work, or do you have the chance to take time for yourself and your family?

Entrepreneurs pay a price for starting and running a business. There should be rewards. Evaluate whether you are satisfied with your job and personal life and make changes accordingly. Not enough time off? Delegate more. If you can't delegate to your employees, find employees who can do the job. Can't trust anyone? Shut down completely at the slowest time of year, take a few weeks off and recharge your batteries.

Endnotes
The items noted above are not the end, but only places to start. For many remodeling companies, especially those in colder regions, winter is a time for preparing for the year ahead. Objectively evaluating your company is an imposing task, and you might not want to face bad news. But growing a company or maintaining a successful enterprise means making hard decisions, and only an informed, knowledgeable owner can make smart choices.

Start the new year on the right foot. A remodeler who starts with the basics and continues to probe within the company will become a better executive. And better executives tend to make more money.