There is an old saying, "numbers don't lie." This is true, but they can also be very confusing when it comes to your remodeling business' profit and loss statement. Why is that?
Most financial programs are set up to accommodate IRS standards. What you and I need is a program that helps us run a more effective and efficient business — a business that pays us well and produces a double-digit net profit.
A few key items to understand:
- How should you structure your P&L?
- Why analyze post-job profitability?
- What is the quickest way to become the financial expert you need to be?
- How will your annual sales volume and gross profit margin affect your remodeling business growth?
When you estimate a job, you have the sale price and your direct costs of that job (e.g. material, labor and subcontractor costs). The difference between the two is your gross profit. With that number, you can calculate your gross profit margin.
My suggestion is to keep your P&L fairly simple. Think of the top section of your P&L like a conglomeration of jobs completed in a period of time (i.e. a month, quarter or year). The middle section should list the supporting costs (overhead) to run your company. The last section details what's leftover (pre-tax net profit) after subtracting your overhead cost from your gross profit dollars.
By structuring and thinking about your P&L in these terms, you have a much more useful tool. For example, if you look at your gross profit margin percentage and it is 8 percent lower than what you've been selling your jobs, you know you have a problem.
To diagnose problems in your business, we recommend post-job profitability analyses for each and every job. I have worked with many companies that never realized how or why they had so much slippage in their gross profit margin. When digging in, they found myriad reasons, including:
- No set pricing system
- Missed items in the estimate
- Labor hours underestimated
- Not signing a subcontractor agreement on each job, resulting in budget overages
- Incorrect orders
- Poor coordination of production team and materials
- Poor drawings, lacking detail, causing rework
- Manufacturer mistakes
- Not using change orders and failure to collect money as changes were made.
Just a couple of these issues can hurt, and if you have all of them, they could put you out of business and/or consume your personal savings.
The main reason for most of these issues is the lack of systems, knowledge and people trained to use the systems. Like having a major bodily injury, it is advisable to seek immediate professional help for your business. Whether your company is healthy or sick, the quickest way to become an expert in your field is to hire a top-notch accounting or business coach.
Annual sales volume and/or gross profit margin are not a cure-all in a remodeling business. Rather, a blend of the two makes it possible to have strong income and quality of life.
For example, I worked with a remodeler who did design/build work as a general contractor. His annual sales were $1.6 million. He was making good personal income but was wearing the general manager, production manager and salesperson hats. His quality of life was fair — not great — and his business stability was totally dependent on him. At his volume, it should be a choice to wear that many hats, not mandatory for the business to survive. In this case, his gross profit margin was not high enough to afford to replace himself in one or more of his roles. So volume is not the cure for him, but rather selling jobs at a higher gross profit margin is.
But, the opposite can be true. I know of a remodeler with a 45–50 percent gross profit margin and sales of approximately $500,000 a year, serving in the same role as the $1.6 million company. The challenge: this owner does not produce enough volume to hire a full-time person to replace himself in one or more of his roles. Know your numbers and how they affect your future as a business owner.
|Doug Dwyer is president and chief stewarding officer of DreamMaker Bath & Kitchen by Worldwide, one of the nation's largest remodeling franchises. He can be reached at email@example.com.|