The remodeling industry has a growing problem on its hands that must be addressed immediately.
Business Metrics that Matter to Remodelers
There are plenty of numbers available to remodelers in their businesses, but how do you know which ones matter? Professional Remodeler talked to remodelers Bill Asdal and Bob Peterson about how they make the most of their data.
There are plenty of numbers available to remodelers in their businesses, but how do you know which ones matter? Professional Remodeler talked to remodelers Bill Asdal and Bob Peterson about how they make the most of their data. Highlights of that conversation appear here. To listen to the full discussion, visit www.HousingZone.com/remex.
MOTSENBOCKER: If I could give you only one number or one piece of information that would tell you the most, what piece of information might that be?
ASDAL: Hands down, without question, the one number you must know is your personal budget, also known as your "burn rate." I would suggest that if you don't know what you're spending, you have no idea of what you have to make. That number is also going to drive the quality and type of life you aspire to. I believe the life that you choose to have should be planned, charted and financed by the companies you own.
MOTSENBOCKER: Bob, how about you?
PETERSON: I can't argue with Bill. However, I'm going to delve into the company and assume I've got my personal ducks in line, and use the gross profit number. That's what drives me.
MOTSENBOCKER: I asked for one piece of information and you both came up with something different, and they're both great. That's not a problem. Now give me the top numbers that help you to analyze that whole number. Bob, what other numbers? You went from the gross profit, but what else?
PETERSON: Obviously, when I use the gross profit, I have to know what it costs me to open my door every day, which is the overhead that comes out of the gross profit, the expenses that get me to my bottom line. That is another number that's key to me. Another number obviously on the other side of that is the cost of goods sold. One of the most important numbers that I look at, to be very honest with you, is a billable hours report from my production staff. I need to know how effective they are at keeping their time above the line in the cost of goods sold versus in overhead.
MOTSENBOCKER: Bill, how about you? I'll let you have go at a few more numbers.
ASDAL: Well, I have to go directly to net profit after taxes. Once gross is calculated, you have operating expenses within the budget, and then there's a big impact with the tax man. My second number is going to be net income after taxes. That number has to be greater than your burn rate for the life you choose to have. My suggestion is that that number should be 150 percent of your burn rate. I would suggest that there are two types of income that I look at. There's active income, which is what your remodeling company makes, and there's passive income, which either comes from assets or from other companies, whether it be real-estate or interest coupons or dividends. Passive income is a very different animal. I will suggest there should be a proactive plan to cultivate passive income and monitor that just like the active income. You have both of these contributors to that net after tax line, active income and passive income.
MOTSENBOCKER: Bob, why is it you have picked those numbers to manage your business?
PETERSON: When I pick gross profit as my key number, the reason I do that is I know what it takes to open the doors of my office. I know what my overhead is. Gross profit is one number that I can look at as a global number and pulling in what Bill's talking about, pulling in my whole personal and corporate life. I can pull it into ABD and look at the overall company, gross profit and know where I need to be. Or I can know again what my overhead is so I can look at individual microcosms of our different divisions within our company. Being design/build we have design revenue, we have retail revenue, we have new construction revenue and we have remodel revenue. I can look at each item with an allocated G&A expense toward that. It tells me where I'm at any given day.
MOTSENBOCKER: That's good. Bill, do you want to add anything to that comment?
ASDAL: I've heard for 30 years that you need a 67 percent markup to get the 40 percent gross profit; a 40 percent gross profit is a target. My basic question is, 40 percent of what? You might have a wonderful structural metric that you're making 40 percent on a $500,000 company, which in that case would be $200,000. But if you have $150,000 of overhead, you're left with $50,000 and after taxes you're left with $35,000 and you're living the life of someone who would spend $80,000. So even in a classic scenario with that balance in place you need to go back and make sure the net bottom line really is sufficient to cover the life you choose.
MOTSENBOCKER: How do you track those numbers? How do they get to you?
ASDAL: Great question. We certainly keep an accurate, up-to-date current set of books. We use QuickBooks Pro. We have multiple companies we're running. Much like Bob suggested, he's got multiple classes of saleable goods, whether it be design, retail, remodeling or new construction. We're running a couple of rental properties and have some passive income flowing. Each one is a separate set. All of that is merged into a master sheet, which we do in Excel. We export regularly very simple reports that come out. P&L is certainly one we look at all the time. Is the company generating the numbers that it is supposed to? We will compare them. A snapshot of year-over-year for net worth becomes a very interesting one. If your net worth is going down but your income is going up, you've got to dial that back on the spending side because your net worth isn't growing. That's another very interesting metric, the year-over-year total personal assets. The company's core mission, at least remodeling companies as I see them, is that they are ATMs. They are cash machines. They're out there to make money. You start it, you run it so you can make money. Now the question is, what do you do with the money and how do you create a passive income stream, or at least apply some good management skills so that you're generating that income and converting it into net worth?
MOTSENBOCKER: Bob, how do you track this?
PETERSON: About five years ago we converted from QuickBooks Pro to Master Builder. We're using it probably as close to 100 percent as a remodel company can. We track things daily. Master Builder provides me with a daily dashboard that I can look at. If I see anything on that dashboard, I have full access to look into it and look at any backup on that report. I get, as Bill said, a P&L and balance sheet by the 10th of the month following the previous month. That's something we've worked hard to do. I've got that to look at. Two other tools that I use to get to that is every Tuesday morning on my desk is an eight-week cash-flow projection. It's based on our scheduling system that we are very emphatic about following. That tells me eight weeks out where we're going to be cash wise. To follow that up, every other week we have developed a separate report outside of Master Builder called a Job Cost Data Report. My project managers and designers are 100 percent responsible for the numbers in that. It tells all. It projects cost to complete, it projects the gross profit, it projects the schedule. It's a fairly large spreadsheet, but that's a very valuable tool to us. Trust me, none of those people like to come in there in front of the company — this is a company-wide meeting we have every other week — and let us know that one of their projects is going in the tank.
MOTSENBOCKER: When you start to evaluate this, do you have a benchmark that you go by?
ASDAL: Yes, I certainly do. I have several of them. I must admit, in this economic time, we've got some very interesting results that are somewhat unprecedented. The very basic benchmark is a business goal to create passive income that exceeds the personal burn rate. I have indexed that for probably a decade or more and indeed follow up on a regular basis. Looking at that passive income number versus burn rate once indexed I was able to find that we could indeed exceed it. I keep looking at that on a regular basis. It's the biggest fundamental one we're looking at.
MOTSENBOCKER: Bob, how about you? Do you have a benchmark out there or several that you use?
PETERSON: We have several that we look at. Obviously, I'm going right back to gross profits. Anytime we fall below 35 percent gross profit on anything here, we start to investigate why. We want to know if that's a manpower situation, if that's a slippage situation. That's probably one of our strongest benchmarks. Another benchmark that I use is that I pull the current ratio up every other week just to see where we stand from a cash standpoint. We work hard to keep that well above the 1.0 level and have been all year been in the 2.0 level. We feel good about that. That's a benchmark that we as a company — my staff included — look at that.
MOTSENBOCKER: Give me an example of when you see a certain number you know it's time to make a change and example of what you did.
ASDAL: I'd like to give you two. The first is directly for the remodeling business. For years and years, we've had a very stable overhead. And when I do more gross sales with that stable overhead, it is a direct correlation to productivity. I can delegate more, I can let guys in the field run subs. We ran our productivity pretty high without increasing overhead to the point that about 17 percent of our gross sales was our overhead. As our gross sales have collapsed in this economy, all of a sudden with half as much volume we've got an overhead at 35 approaching 40 percent. That tells us a lot of things. No. 1, if you're going to hold productivity stable I've got to cut overhead. Based on heartfelt loyalty and knowing how tight we've been for years, we kind of suck it up a little bit in this economy to keep everybody going, cut margins, cut where we can. Ultimately, many in the industry are faced with some very hard personal decisions about laying people off. Knock on wood, we seem to have flattened out at the bottom of our gross sales. We are sustainable. We are certainly nowhere near the profitability or overhead levels we've been burning, but those were pretty tight to start with. I think that is an actionable number to have, those ratios of gross sales to overhead. When they start getting out of whack that really is the clarion call to either find new sources of top line revenue or you really have to compress sales.
MOTSENBOCKER: Is there any number, especially in this economy, that you've been looking at that said you've got to do something sales-wise or marketing-wise?
PETERSON: One of the other tools that we use is that we track our leads very intimately — where they come from, how they get here and what the projects are. I'll use a specific example: In October 2008, in looking at a third-quarter lead report for 2008, I saw a trend of leads decreasing greatly. That was a key turning point for us to evaluate, one, where those leads were coming from, and two, where we were going to be for projected revenue for 2009. We started working hard as a staff — not just me. My staff was engaged in looking at P&Ls on where we could cut our overhead. We started working on our overhead. Personnel, as a result of that, we're seven people leaner in 2009. Overhead, we cut about $250,000 out of that. That really all came from our lead tracking system as a beginning.
MOTSENBOCKER: Bill, anything in particular that you've done that changed the way you were doing business as far as leads are concerned or sales?
ASDAL: Yes, no question about it. It's as simple as cash flow for us. Payroll needs to be met on Friday, and if it's not there, we'd better wake up and wake up plenty soon enough to generate billable times. There have been many of the readers who look at that weekly payroll and either have it or not. Without a forecast mechanism of what it is, also many will reach into their pocket and fund the shortfall from personal assets. I would add a caution and an asterisk to those who are doing that. You can fund a company that is going backward until you go broke. I would say the time a company needs to shut its doors is when it can't pay its bills without your reaching into your pocket. Cross-pollinating personal expenses and company expenses or other assets back into the company is very dangerous turf. Then you need to accommodate repayment of those debts or loans back to the company. Really looking at hard cash and how long it's going to last, where it's going to go and how far you want to carry overhead.
MOTSENBOCKER: Do either one of you or both of you track the hours that are spent on an individual sale? For instance, a program we implemented here was all salespeople — and salespeople are estimators in our case — track their time by the half hour. When we get done with a project, we actually know how much time that salesperson and estimator and the amount of hand holding we've done on that particular client.
PETERSON: We track our time as a staff to 15-minutes. Salespeople hate it; because they're commissioned they feel like they shouldn't be accountable. One of my training goals with a salesperson is to teach them to understand that if you spend 100 hours holding someone's hand to get a $20,000 project, they did not make any money. Again, I try to teach them to look at this as a business of their own. They need to be efficient in that aspect. We have a full-time estimator. My salespeople do not estimate. They are responsible for working with the estimator to put the project together, but that estimator tracks his time by every 15 minutes as well. We do track that so that we know where we're spending out time.
MOTSENBOCKER: Bill, do you track that time?
ASDAL: I admire those who can. I track it anecdotally. There is a breakline, and I see this as one on the far side of the bridge where to gather that level of data and analyze it for the size and volume we are doing is probably one that I would not specifically invest in. In the field, we track it to the hour what they're doing by the task, but the overhead and breakout in terms of sales is anecdotal only. The time of lead generation has long extended; the time to close has long extended; the hand holding, the investment to get to a close is extended. It's a great point, wonderful piece of data — I'd actually like to have it — but I choose not to invest and track in it.
WE HAVE SHARPENED OUR SALES TECHNIQUES TO PRE-QUALIFY AND GET RID OF AS MANY AS SOON AS POSSIBLE THAT MIGHT HAVE BEEN SHOPPERS IN DAYS OF YORE. WE PRETTY MUCH NEED TO KNOW WHETHER THESE THINGS ARE A GO OR A NO GO VERY EARLY IN THE PROCESS BEFORE WE INVEST A WHOLE LOT OF THAT TIME.