How much money did you make last year? Was it more or less than you predicted it would be? And do you know exactly why returns varied?
Being able to answer such questions is essential in business today. For most businesspeople it's Financial Management 101, but for many remodeling company owners, making or losing money is a mysterious process that seems to happen by itself. In some cases, the company owner is concerned mainly about the craft and doesn't think of the company as a business. In other cases, the owner is so busy getting all the work done that there is little time left to devote to analyzing the business side. Still other remodeling companies have benefited from a decade of strong market demand that transformed selling into “order taking.” In that kind of environment, many remodelers were profitable in spite of themselves.
Those days, some would argue, are quickly disappearing. Interest rates are creeping up, home appreciation is returning to normal levels, and the business environment is more competitive. In these conditions, focusing on questions of profitability is critical to your success or failure. The following are some key areas on which to shine your spotlight.
Plan for profit. An airplane pilot who takes off without a flight plan can't predict when or where the plane might arrive. A remodeling project is no different. Most remodelers would never build a deck or renovate a kitchen without a blueprint, and those who have tried know how unpredictable the results can be. Yet, many remodelers who don't have a blueprint for their business are surprised at the unpredictable results.
A long-range plan is best, but you can start with something that just addresses the coming year. It doesn't have to be complicated either, but it should address the basics. Start by writing down revenue and profit goals for the year. Use historical data to develop key indicators such as total sales, gross profit, and overhead, and then tie everything to your current goals using a month-to-month action plan. Like the adage says, “A failure to plan is a plan to fail.” Without a plan, you have chaos, and chaos will cause you to lose money.
Numbers don't lie. Four key indicators are essential to a remodeling business: sales revenue, gross profit percentage, gross profit dollars produced (just like a factory, you make money on how much you produce, not how much you sell), and overhead expenses. If your plan can predict each one of these month to month, then you will know whether you are exceeding your targets or falling behind. It's OK if one key indicator is a little ahead and another is behind; you can reach your goals. But if key indicators stray too far from plan, you should know why.
It could be that your goal was unrealistic to begin with. In many cases, however, the problem lies in some aspect of executing the plan. For example, if sales are 80% of plan, but overhead and gross profit percentage are on target, unless you increase sales or gross profit, or decrease overhead — or all three — you will fall short of your goals and you will lose money.
Monitor and adjust. A pilot stays on course by making hundreds of minor adjustments during the flight in response to weather, airspeed, or air traffic issues. The same is true of your plan. Check it monthly, even weekly, so that if you begin to stray off course, you have plenty of time to make adjustments. If you get too far off course, it might be impossible to get back on track.
Publish the plan. Your plan should be everyone's plan; don't keep it a secret. Invest the time not just to create a plan but also to determine a strategy to communicate and get buy-in on it from everyone on your team. To achieve the results you want, you need everyone pulling together.
The answers to questions about how you make or lose money are easy. The hard part is making meaningful predictions and keeping your team on course. — Mark Richardson is president of Case Design/Remodeling and Case Handyman Services, Bethesda, Md. He was recently named a Maryland Ernst & Young Entrepreneur of the Year for 2006.
