A clear business plan that includes goals and the means to achieve them is the key to running an efficient, profitable company. Business owners who keep their eye on the ball are more likely to complete a profit plan that assures a solid future. The fall and winter, when business starts to slow down, is the right time to reflect and examine the company’s year-end results as the numbers start to come into focus. It is good to do this while the current business year is top of mind as it allows both the positives and negatives to be reviewed, thereby using them to develop a plan for the future.
What gets measured is what gets done
Assessing a business requires a hard look at the financial data to analyze the income as well as critique the costs and expenses, which will ultimately provide the final profits for the year. There are a number of variables that factor into a company’s year-end profitability. Obviously, the income generated comes from labor, cost of materials, and overhead expenses. To properly plan for the next year, profits or losses need to be analyzed to establish benchmarks for the following year.
One way of doing this is using a SWOT (strengths, weaknesses, opportunities, and threats) analysis as it is an effective approach to strategic business planning. This four-part process helps owners realistically analyze the past year’s business performance with an eye on starting the coming year with a clear picture of where the business owner wants the company to go by outlining any changes that need to be made and taking early action to put them in place.
Strengths are the internal characteristics of a particular business that sets it apart from its competitors. What did the company do this past year that generated the most income/profit? Which segment of the business offered the most positive results? Keep in mind, just because sales are up does not mean more profit as the cost to generate the sales must be examined first.
Weaknesses or limitations are those areas where efficiency is lacking. For example, poor customer service, inexperienced laborers, or even the inability to collect money.
Opportunities are identifying those that represent positive changes going forward. A few examples include: increasing staff education, offering newer, energy efficient products, or finding new business ventures.
Finally, threats are external influences that could cause trouble in a business. Examples, in this case, include financial and government policies which make it difficult to borrow money or add cost to the business operation. Another threat may be competitors who charge a lower price.
The SWOT assessment is useful if owners take the time to carefully and realistically go through each step. The process will help achieve a competitive advantage and a healthy profit plan for the coming year.
Any businesses’ financial picture includes costs for direct material, labor, subcontractors, as well as indirect expenses. In addition, there are hidden costs that are not normally attributed to a particular job or function. It is critical to the future of the business to use a systematic approach to financial information. By analyzing job costs, it becomes easier to identify trends. Owners should ask themselves: “If labor and/or material costs increase, should the amount customers are charged increase as well?” A major downfall for many business owners is trying to match a competitor’s price. In this case, another question should come to mind: “Is the competitor running the business?”
How much is the business worth? A part of the hidden job costs is the business owner’s own value to each job. In this case, it is important to understand what it would take for them to place themselves in the job market, and at what hourly rate? A proportional wage should always be included in job costs. Take the base salary, health and life insurance costs, vehicle expenses, travel to conferences, and any bonus or draws—everything the company pays for the owner. Divide this into the projected jobs per year and then add this to the cost of each job.
A major impact on the bottom line is ‘non-billable time.’ This employee hidden cost should be considered when determining the hourly rate applied to managing the customer. Take a hard look at all billable time on service work. If the technician is paid $20 per hour, then add the cost of taxes, insurance, and other expenses. It may be a surprise to learn the raw cost of each employee is $30 per hour. In addition, calculate how much time is wasted each day, which are non-billable hours that cannot be directly charged to the customer. Do not be caught by surprise at the actual (higher) rate the business is paying because of these non-billable costs. Also, the company truck should be billed as an additional technician on the job. Therefore, if there are two technicians on the job, base the rate on two technicians plus the truck, and the owner/manager. This will provide the true labor charge, which should be based on four employees, not two.
Question every cost. Business owners should ask themselves: “Does this expense add value and contribute to the bottom line? Are there alternative ways to achieve the same result? Is there a cheaper, better, or faster way to get the job done?” Always look for more ways to reduce costs. The more cost reduction, the more bottom line profit.
Collections: It is the company’s money
A profit is not made until the money is collected. Cash efficiency is the key to a profitable business. The sooner a business gets paid, the more profit will be realized. Historically, pool professionals have been reluctant to ask for payment. For some, there is a fear of losing the customer. What value does a customer provide if they do not pay what they owe? Take this exercise for example: Go through the company’s financial records, if a 10 percent profit was generated, and an invoice for $1000 is written off for nonpayment, $10,000 in new sales must be generated to pay for that write-off. The time value of money theory is in effect when collections are not made in a timely manner. Each month the customer receivable is on the books, it affects the company’s bottom line profits. Businesses must make it a priority to collect their money.
Building an expense control culture that rewards employees who figure out a way to reduce cost and improve profitability can make all the difference for an organization. Businesses should reward for profits made on a job by monitoring efficiency and rewarding employees with a bonus. Looking for specific areas that merit rewards can include: no lost time, no job site accidents, positive internal workplace safety reviews, and avoiding non-billable hours. Keeping track of tools and wasted materials on the job is also important.
Employees are the eyes and ears of the business in the field. They should be trained to identify changes in customers’ behavior and provide alerts (e.g. future payment issues). Give employees examples of ways to cut costs and challenge them to achieve the cost reduction goals. Consider this ‘ground-level intelligence.’
Actions speak louder than words
Business owners need to walk the talk when it comes to running an efficient business. Owners who are serious about controlling costs demonstrate it with their actions, and then employees will do the same.
There is no way to predict the financial future without a true measurement of how the money is being spent. There have been times in this author’s experience where hasty decisions were made based on knee jerk reactions related to customer and employee issues. Not only were these decisions risky to the bottom line, but also led to a feeling of spinning out of control.
In these cases, business owners should take a step back, take a deep breath, and assess the long-term consequences of decision-making. In doing this, it will help owners become a more proactive, profitable, business entrepreneur.
This article was written by Connie Sue Centrella and originally appeared on Pool & Spa Marketing [link].