December 15, 2010
The right way to grow profits
By Mark Bradley
Dan and Bill decided to meet and discuss some ideas to improve their businesses in the coming season.
After sitting down, Bill gets straight to the point, “So Dan, what have you come up with?”
Dan says that he definitely still has some work cut out for him, especially in regards to improving his company’s net profit. “I was planning on a big advertising blitz,” he shares, “and trying to sell enough work to get another crew out in the field.”
Bill responds, “That’s one way, but is growing your business a true goal of yours, or are you really just looking to improve your profit?”
Dan answers, “I’m most concerned with profit, right now.”
“Sometimes growing sales is the right way to grow profits,” said Bill. “Increased sales help spread overhead costs, which won’t necessarily increase with more sales, across a greater amount of work, thus making the business more profitable. If you can continue to manage more work just as profitably, then you’re OK.”
Bill paused for a second, and then added, “But you can get further, faster by being more efficient. Look at it this way: your cost of goods sold last year was around $750,000. That includes the total costs of your labour, materials, equipment and subcontractors. If you cut just five per cent of those costs by getting more efficient and productive, you could save your company about $37,500 – added right to your bottom line. Do you know how much work you’d have to sell to add that much profit?”
Dan was silent as he thought for a minute.
“Let me show you,” said Bill. “An average company in this industry might earn about four per cent net profit. Some do less, and some do more, but four per cent is a pretty typical number. It’s not enough, in my opinion, but it is typical. At a four per cent net profit, you’d have to sell $937,000 worth of work to add that same $37,500 in net profit.”
“What? I’d have to add almost a million in sales?” shouted Dan. “That can’t be right!”
“Sure it is,” said Bill. “Do the math. Four per cent of $937,000 is $37,500. If you continue to earn a four per cent net profit in your business, you need to add almost a million in sales to get the same result.
“Let me share with you some methods that will save five per cent on your costs next year.” Bill pointed out to Dan that there are four main areas upon which he needs to focus.
He explained that the first area is labour costs. “To cut labour costs, you need to cut every hour of waste out of your organization. And trust me – every one of us has wasted payroll hours that need to be turned into productive hours,” says Dan. “Your people need to spend more time on productive activities and less on non-billable activities and/or mistakes. That’s very possible with the right systems.”
Bill revealed two fundamental techniques to reduce labour costs: information sharing and timekeeping.
“Dollar for dollar, equipment is more productive than labour. Think about tasks that your crews do by hand that could be really streamlined with equipment. Which is greater, the monthly payment on a machine, or the costs of doing work by hand?”
Bill continued, “If your equipment is in good working order, then you can skip this tip. But equipment that breaks down costs you in repairs, it’s even harder on wages. Your wage costs will increase when the equipment is down, because your crews will do the work by hand until the equipment is back in service. Older equipment often will drive up your wage costs; sometimes so much that it would be cheaper to run brand new equipment.”
“Paying vendor delivery charges might increase your material costs slightly, but it will save you on labour costs. Instead of paying a $50 delivery charge, you send your guy to go pick up the materials. You’ve spent money on his wages (a cost), but you’ve also lost one hour that could have been spent on billable work. The combination of paying for downtime and losing production time can be deadly,” cautioned Bill.
Bill continued, “As a company, you’re all in this together. If the company does well, you can all afford to do better. If the company is limping along, then so will its employees. Teach your employees what mistakes actually cost the company. Give them the responsibility and accountability to eliminate the causes of productivity problems. If they can save just five per cent of their time due to mistakes and waste (and you know they can), the results will be extremely favourable to your bottom line.”
Bill summed it up, “You’ll build a better, more efficient business that is far easier, and much more enjoyable to run, if you reduce these costs, rather than trying to add the same profit by increasing sales.”
Mark Bradley is the president of The Beach Gardener and the Landscape Management Network.
Dan and Bill decided to meet and discuss some ideas to improve their businesses in the coming season.After sitting down, Bill gets straight to the point, “So Dan, what have you come up with?”
Dan says that he definitely still has some work cut out for him, especially in regards to improving his company’s net profit. “I was planning on a big advertising blitz,” he shares, “and trying to sell enough work to get another crew out in the field.”
Bill responds, “That’s one way, but is growing your business a true goal of yours, or are you really just looking to improve your profit?”
Dan answers, “I’m most concerned with profit, right now.”
“Sometimes growing sales is the right way to grow profits,” said Bill. “Increased sales help spread overhead costs, which won’t necessarily increase with more sales, across a greater amount of work, thus making the business more profitable. If you can continue to manage more work just as profitably, then you’re OK.”
Bill paused for a second, and then added, “But you can get further, faster by being more efficient. Look at it this way: your cost of goods sold last year was around $750,000. That includes the total costs of your labour, materials, equipment and subcontractors. If you cut just five per cent of those costs by getting more efficient and productive, you could save your company about $37,500 – added right to your bottom line. Do you know how much work you’d have to sell to add that much profit?”
Dan was silent as he thought for a minute.
“Let me show you,” said Bill. “An average company in this industry might earn about four per cent net profit. Some do less, and some do more, but four per cent is a pretty typical number. It’s not enough, in my opinion, but it is typical. At a four per cent net profit, you’d have to sell $937,000 worth of work to add that same $37,500 in net profit.”
“What? I’d have to add almost a million in sales?” shouted Dan. “That can’t be right!”
“Sure it is,” said Bill. “Do the math. Four per cent of $937,000 is $37,500. If you continue to earn a four per cent net profit in your business, you need to add almost a million in sales to get the same result.
“Let me share with you some methods that will save five per cent on your costs next year.” Bill pointed out to Dan that there are four main areas upon which he needs to focus.
He explained that the first area is labour costs. “To cut labour costs, you need to cut every hour of waste out of your organization. And trust me – every one of us has wasted payroll hours that need to be turned into productive hours,” says Dan. “Your people need to spend more time on productive activities and less on non-billable activities and/or mistakes. That’s very possible with the right systems.”
Bill revealed two fundamental techniques to reduce labour costs: information sharing and timekeeping.
Information
“Every foreman needs to know what the estimator was thinking when the job was priced in order to bring the job in on budget. How many labour hours were bid? What equipment should be used? What materials and how much of each? Putting together a job package takes an hour or two of preparation. Not putting this information in a foreman’s hands will cost you hundreds, maybe thousands, of man-hours over a year in mistakes, miscommunication, and poor planning/preparation.Timekeeping
“If your people are writing their hours and rounding-out their written times for payroll, stop because it’s hurting you more than you know. We use an electronic time-keeping system that runs from a smart phone. Non-productive time is minimized, because the foremen must book their payroll hours to something; either a job, or shop time. If they book too much time to a job, they’re going to go over hours and must be accountable for the overages. If they book too much time to downtime, they are also accountable for that. Our payroll costs dropped significantly, once we implemented a system that forced us to look our downtime right in the face; right down to every last hour.”Replace labour with equipment
Bill recommended two strategies for Dan: using his equipment to replace his labour costs, and think about replacing older equipment with newer equipment.“Dollar for dollar, equipment is more productive than labour. Think about tasks that your crews do by hand that could be really streamlined with equipment. Which is greater, the monthly payment on a machine, or the costs of doing work by hand?”
Bill continued, “If your equipment is in good working order, then you can skip this tip. But equipment that breaks down costs you in repairs, it’s even harder on wages. Your wage costs will increase when the equipment is down, because your crews will do the work by hand until the equipment is back in service. Older equipment often will drive up your wage costs; sometimes so much that it would be cheaper to run brand new equipment.”
Minimize waste
“Wasted material and inventory equals money that you’ll never get back. Give your crews job packages, so they know exactly what to order, and how much. Minimize inventory at the shop, unless you know you need it,” emphasized Bill.“Paying vendor delivery charges might increase your material costs slightly, but it will save you on labour costs. Instead of paying a $50 delivery charge, you send your guy to go pick up the materials. You’ve spent money on his wages (a cost), but you’ve also lost one hour that could have been spent on billable work. The combination of paying for downtime and losing production time can be deadly,” cautioned Bill.
Bill continued, “As a company, you’re all in this together. If the company does well, you can all afford to do better. If the company is limping along, then so will its employees. Teach your employees what mistakes actually cost the company. Give them the responsibility and accountability to eliminate the causes of productivity problems. If they can save just five per cent of their time due to mistakes and waste (and you know they can), the results will be extremely favourable to your bottom line.”
Bill summed it up, “You’ll build a better, more efficient business that is far easier, and much more enjoyable to run, if you reduce these costs, rather than trying to add the same profit by increasing sales.”
Mark Bradley is the president of The Beach Gardener and the Landscape Management Network.