Are you making the money you thought you would in 2018? For most companies I interact with, the answer is “no.” Many have seen top-line sales go up, but profit margins are not as high as they want. Why is this happening, and what should you do to change it? When most builder/remodelers launch into a new year, they project three primary financial elements:
How much revenue will we generate?
How much will projects cost to build?
How much are the overhead costs?
What’s left over is the profit. More specifically, if you’re generating $2 million in revenue, and construction costs are $1.3 million, then your gross profit is $700K. If your overhead (including salaries, rent, insurance, etc.) is $500K, then net profit is $200K, or 10 percent of revenue. But for many businesses right now, that’s not the case.
This diagram helps illustrate what's happening for many remodeling businesses. It's also a tool to help take inventory of your own results.
What’s Happening Today
a) Material costs are higher than estimated.
b) Subcontractor costs are higher than estimated.
c) Clients are more difficult, which results in indecision, delays, and more costs.
d) Projects are taking longer, which adds cost.
e) Labor costs are higher than anticipated.
Now let’s look at the financial formula. If you’re generating about $2 million in revenue, and construction costs (based on the above reasons) are $1.4 million with an overhead of $550K (based on the above reasons), then your net profit drops to $50K (or 2.5 percent). This is not a happy picture when you’re working harder than ever.
A Few Tips to Handle Shrinking Profits
1) Increase your markup. I generally recommend inching it up two to three points every quarter, so by the end of the year it is up 8–12 points
2) Use more allowances. While too many can be disruptive, allowances move some of your cost risk to the client. After all, how can you predict price increases?
3) Lock in prices. Get trade contractors and suppliers to commit to their prices for six or nine months. It may cost a few dollars, but it will make expenses more predictable.
4) Position yourself with clients. Try to be seen more as a trusted advisor than a bidder. A wealth advisor can’t guarantee what the stock market will do. You shouldn’t be accountable for what you can’t control, like cost creep.
5) Get buy-in from the team. Have a meeting with key people focused specifically on this subject, and hold people accountable for the solutions.
There are other things you can also do to impact this equation, such as creating incentives, looking for cost efficiencies, and getting projects completed faster.
The bottom line is you are in business to make a profit. Make this a top priority to fix so you’ll be well positioned for 2019.
Mark Richardson, CR, is an author. columnist, and business growth strategist. He authored the best-selling book, "How Fit Is Your Business?," as well as his latest book, "Fit To Grow." He can be reached at firstname.lastname@example.org, or 301-275-0208.