Once upon a time …
Joe grew up holding the toolbox for his father — he could do anything with wood and had a passion for turning homeowner's dreams into magic. After years of watching others reap the rewards of his hard work, Joe started his own remodeling business. Joe was a free man — free to set his own hours, free to choose his path each day and free to align his business and personal goals.
Joe works from dawn to dusk as he lives the American dream. Joe has grown his business to a team of four (three carpenters and one person to help out part time in the office) based solely on past clients and referrals. As a reward for all those long hours, Joe got himself a Ford F-250 Super Duty extended cab with leather seats, six wheels and 12 speakers. The adrenaline of owning his own business fuels his pride. Clients rave about his craftsmanship and about his hands-on service. And to top it off, Joe's bank account seems to grow on its own. Life couldn't be better.
Two months later, the economy has gotten tougher, clients are more hesitant to proceed and Joe's bank account is shrinking. Thankfully he has four large jobs to come and when these proceed, Joe will be back on track.
Joe is struggling to make payroll. Only one of the four jobs he was counting on in the last two months went to contract. Joe went back to the clients that didn't proceed and offered them each a 30 percent discount. He needs the cash to make payroll; to pay bills from subs and suppliers on jobs he finished last month and to keep his team busy. Thankfully two clients agreed to proceed.
Joe's team is busy, and Joe is working harder and faster than ever. But Joe still can't make payroll; bills from suppliers and subs are piling up (they're calling him every other day looking for payment); the phone company is threatening to shut him off; and his wife is upset that Joe hasn't brought any money home for the last two months.
Joe is confused. He works hard. He grew a large remodeling business from the ground up. His clients love him. His employees love him. But he can't pay the bills, much less himself. His marriage is strained, he is getting a sharp pain in his chest and he can't sleep.
This “fairy tale” is all too real. Many of us get into the remodeling industry for all the right reasons and then forget how to keep our business healthy.
What should Joe have done?
In hindsight, Joe made a number of decisions that decided his destiny. While he built the top line sales of his business, Joe didn't charge enough to cover his costs. As a result, Joe was forced to further cut his prices to keep his team. And without shedding overhead — cutting payroll, selling his pick-up, etc. — Joe was trapped in a corner.
So how can Joe get out of the corner — or how could he even have avoided it in the first place?
Step one: Create a simple business plan. There are three key variables: sales, gross profit percentage and overhead. Pick two to start, then back into the third variable depending on how much net profit you need to make.
Step two: Establish two bank accounts. Cash you collect from jobs under construction goes into one bank account and is used to pay bills and payroll from that job. When the job is closed and all bills and payroll are paid in full, any excess cash goes into the second bank account — this is your cash. Cash in the first bank account is not yours — it is cash to build the project.
Step three: Track the numbers going forward. How are sales, gross profit percent and overhead doing versus the plan? How is the cash balance in bank account No. 2?
What inspired me to enter this business will be only one key element that sustains me and my business. The discipline to balance a love for the craft, a commitment to my team and to my clients and a mind for business — that is what will sustain me and my business.
Give your input and continue the dialogue on Bruce's blog at www.housingzone.com/brucecase.
|Bruce Case is President of Case Design/Remodeling and is Chief Operating Officer of Case's national organization, Case Handyman & Remodeling. He can be reached at firstname.lastname@example.org.|