25 ways to increase profits-2 - gocms.informacre.comyear 1 income 600,000 cogs (420,000) gross...

25 Ways to Increase Profits

© 2017 The ShinerGroup. All rights reserved. 1

Leslie C. ShinerOwnerThe ShinerGroup

A copy of this presentation is available upon request to

[email protected]


Leslie Shiner

• Owner of The ShinerGroup

• Financial & management consultant for over 25 years– MBA in Accounting and Finance from U.C. Berkeley

– Advanced QuickBooks ProAdvisor

– Sage Certified Consultant

• Columnist– Remodeling Magazine

• CPA Practice Advisor Top Thought Leader

• Author– A Simple Guide to Turning a Profit as a Contractor

– (www.MoneyMazeBooks.com)



Continuing Education Credits

Informa Exhibitions is a registered and/or recognized education provider with The American Institute of Architects Continuing Education Systems. Attendees can earn credit upon completion of this program provided you sign in with appropriate license number on forms provided at the seminar room check-in tables. Electronic Certificates of Completion for all attendees will be available 7-8 weeks post show.

This course is registered with AIA CES for continuing professional education. As such, it does not include content that may be deemed or construed to be an approval or endorsement by the AIA of any material of construction or any method or manner of handling, using, distributing, or dealing in any material or product.

Questions related to specific materials, methods and services will be addressed at the conclusion of this presentation.

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This presentation is protected by US and International copyright laws. Reproduction, distribution, display and use of the presentation without permission of the speaker is prohibited.

© 2017 The ShinerGroup. All rights reserved.



Learning Objectives

• Increase profits by focusing on the five areas of significance–estimating, sales, project management, financial management analysis, and strategic management

• Create a plan for increased efficiency

• Identify quick-fix solutions for improved profitability

• Outline 25 ways to implement cost savings, measure efficiency tools, and financial strategies for your company

How Do You See Your Business?

Do you see a series of ongoing, overlapping jobs?

Fitch Remodel

Hooper Job

Garber Gazebo

Smith Job

Frank Bath



Understand The Profit Cycle

Analysis

Accounting

Production

Estimating and Sales

PROFIT

Five Areas of Significance

Estimating and sales

• Project management

• Financial management

• Analysis

• Strategic management for profit




1. Know how to create a proposal as a repeatable process– Utilize software to create proposals

• Look to similarities in all jobs for template

– Distinguish between the “Budget” and the “Proposal”• Create a proposal for the client

• Create a budget that will be the basis of all job cost reports

– Measure productivity

– Understand your overhead

– Know the difference between markup and margin

What is Negotiable?

Direct Job CostsLabor

MaterialsSubcontracts

Equipment

Overhead

Profit

Non-negotiable without change of scope

Negotiable



Budget vs. Proposal

Direct Job CostsLabor

MaterialsSubcontracts

Equipment

OverheadProfit

Budget

Your costs

Used to compare estimated costs to

actual costs

Proposal

Your revenue, your client’s

costs


2. Create a Process Map– Involve all company staff

– Deal with all aspects of projects

– Create company standards

– Planning, documentation & accountability

– Near real time reporting

– Change order / revision process

– File & information management



From Simple to Complex

Process - Sample

Mar

keti

ng

Sal

es

Des

ign

Pro

duct

ion

Off

ice

Lead Tracking X XClient Meeting XBudgeting X XProposal XEngineering XProject Management XEquipment Order & Tracking XDemolition XFraming XFinishes XTrim XPunch List XChange Orders X XReview X XWarranty X


3. Deliver an excellent on line presence– Have an accurate, up-to-date, inviting website

– Engage in social media

– Blog regularly

– Manage your online reputation

– Explore online listing

– Track online activity



Effective Website Marketing

• Unique page content

• Avoid duplicated content

• Link building (inbound & outbound)

• Clean & consistent pages

• Boost SEO (Search Engine Optimization)

Must Haves on Your Website for Credibility

• Business process

• Professional project, pictures, galleries

• Contact info & web-lead form

• Mission/vision statement

• Company history, employee history

• Community involvement

• Awards & certifications

• Publicity

• Testimonials



Effective Social Media

• Add professional after-pictures of recently finished projects

• Post recent blog & news: news that affects potential and existing customers

• Let Facebook fans, Twitter followers, or LinkedIn connections know when you win awards or get recognized

• Consider Houzz

• Create Buzz!

Other Online Activities

• Create and manage email list

• Create blogs– Latest news and topics that can affect existing and

potential customers

– Update regularly

• Create newsletters– Can combine with blogs

– Nurture prospective clients until they’re buy-ready

• Manage online reputation




4. Ask for referrals– Then ask for referrals again

#1 Source of new work comes from referrals and repeat business


• Estimating and sales

Project management


• Analysis




Production

5. Create and utilize schedules– Create schedule to improve sales

• Use a schedule as part of your marketing plan

– Create schedule to improve procurement • Prior to the start of the job and during the job

– Create schedule to improve production • During the job to improve productivity with subs and

employees

– Just one way to improve profit

Create a Gantt Chart



Create a Schedule and Update it!

Crew B Crew CCrew A

Production

6. Manage change orders – Are you consistently going over budget?

• Could it be that there is more work done in the field than in the original scope of work

• Start from the beginning - during the sales process– Clearly state the scope of work in the contract

– Define the process for changes

– Prepare your client for change orders

If you are already doing the work…Why not get paid?



Create a Process for All Changes

• Create field documentation– Change order work authorization form

– Filled out on the job• Manually or electronically

– Three part form for 1) client 2) field 3) office

– Not necessary to include pricing

– Get signature from client

• Make the process easy for your field crews

Too much paperwork may mean more free work

Be Honorable

• Don’t sell the job just for the change work

• You can’t improve profits with angry clients!



Stop Losing Money on Change Orders

• Review past jobs– Did change orders cause slippage in estimated gross

margin?

• Create zero dollar change orders – Turn change orders into “Profit Center”, not

administrative nightmare

• Consider ‘Processing Fee’ on all change work

Production

7. Manage employees – Use daily timecards

– Are your most expensive employees doing the most difficult tasks?

• Who goes on the material runs?

– Do you need to hire more field personnel or help your current crews be more efficient?

• Consider using a Contract Administrator



Manage Employees

• Invest in your staff– Consider training as an investment

• Not just an additional costs

– Cost to replace employee = 40% annual wages

– Help employees understand your business and the costs associated with hiring employees

Consider Bonuses

• Bonuses provide flexibility– Wage increases are typically permanent

• Bonuses based on net profit are difficult to predict– “What can I do differently today to increase my bonus?”

• Bonuses based on gross profit can improve production– Provide estimated hours on job

– Provide reports to show estimated costs to actual costs

– Provide incentives to keep jobs on track

– Can base incentives on time instead of dollars



Production

8. Manage subcontractor relationships– View subcontractors as source of additional revenue;

paying their overhead and profit can make you more profitable

– Set expectations with subs

– Respect their time

– Communicate schedule in advance

– Pay promptly

Production

9. Create system for efficient material procurement– Have the right material on the right job at the right

time– What is the cost of one more box of nails? – Avoid jumping at the “deal” for bulk purchases

• Utilize a Purchase Order system– Not a PurchasED Order System– No purchases without prior authorization– Control employee credit card spending with strict

limits






Financial management

• Analysis


Financial Management

10. Require accurate job costing– Accounting without job costing is like driving without

a map

• If you aren’t job costing, you can’t measure margins– Create the end result (job cost reports) to begin the

process of job costing

– Decide what you really need to track?• Labor has the most risk

• Are you tracking labor dollars and labor hours?




11.Clearly distinguish Markup and Margin

• Why is gross margin so important?– Gross profit ($) is used to cover overhead and leave

money for profit

– Gross margin (%) should be consistent across jobs

• Need to review gross margin – For company across time

– On a job by job basis

– By type of costs (subcontract vs. labor)

– By type of client (commercial vs. residential)

Are You Happy With Your Gross Margin?

Income 400,000COGS (250,000)Gross Profit 150,000

Year 1

Income 600,000COGS (420,000)Gross Profit 180,000

Year 2

Gross Margin = 37.5% Gross Margin = 30%

Which year was more profitable?

Was the growth profitable?



Markup vs. Margin

• How do you price jobs?– Do you multiply estimated costs by a certain

percentage?

– How did you arrive at that number?

• Know the difference between Markup vs. Margin– Markup is a percentage of costs

– Margin is a percentage of income

Margin MarkupIncome 1,000,000 100.00%

Cost of Goods SoldEquipment 200,000 20.00%Labor + plus burden 400,000 40.00%Subcontractors 50,000 5.00%Total Direct Expenses 650,000 65.00% 100.00%

Gross Profit 350,000 35.00% 53.85%

Overhead 250,000 25.00% 38.46%

Net Profit 100,000 10.00% 15.38%

Markup vs. Margin

Company

Markup Vs. Margin

To produce a margin of 35%...

You need a markup of 54%



What Happens if You…

• Look at Profit and Loss Statement– Determine overhead to be 25%

– Determine profit to 10%

– Great!

• Create proposal for next year’s work– Determine raw costs ($650,000)

– Add 25% for overhead

– Add 10% for profit

Common Mistake

Bid Price=Budget * OH * ProfitIncome 1,000,000 Bid (650,000 * 1.35) 877,500

Cost of Good Sold Cost of Good SoldMaterial 200,000 Material 200,000 Labor + plus burden 400,000 Labor + plus burden 400,000 Subcontractors 50,000 Subcontractors 50,000 Total Direct Expenses 650,000 Total Direct Expenses 650,000

Gross Profit 350,000 Gross Profit 227,500

Overhead 250,000 Overhead 250,000

Net Profit 100,000 Net Profit (22,500)

Markup (GP/Costs) 53.85% Markup 35.00%Gross Margin (GP/Income) 35.00% Gross Margin 25.93%

First Year Second YearCOMPANY COMPANY

Using a Margin as a Markup



Markup and Margin

• To estimate with markup– Costs times (1 + markup)

• To estimate with margin– Costs divided by (1 – margin)

• Financial statements typically provide marginnumbers only

• Overhead is typically represented as a marginnumber (percent of income)

Can You Say This?

“Since my overhead is less than 30%, as long as I markup 35% I’ll make a profit!



Can You Say This?

“Since my overhead is less than 30%, as long as I markup 35% I’ll make a profit!

Do You Use This Report in QuickBooks?

• It’s a great report – It shows gross profit by job!

• But…

– Shows Markup , not Margin!




12.Understand and account for labor burden– Know how much it costs to put an employee in the

field

– Include fully burdened labor in estimates and job cost with same fully burdened rate

– Include costs such as payroll taxes, workers compensation, liability insurance

– What about other costs such as vehicles, tools, communication equipment?

Consider Other Costs?

• Variable overhead or “Indirect Direct” – Communication equipment, cell phones

– Vehicle costs

– Small tools/supplies/consumables

– Unbillable time, down time, windshield time

– Safety meetings, production meetings

– Education, training and certifications

• All costs that belong to employees– Ask yourself: If I hired another person,

what costs would go up?



Let’s Run Some Numbers

• Costs that are a percentage of wages

HOURLY COSTS:Gross 25.00

Social Security 6.20% 1.55Medicare 1.45% 0.36State Unemployment 3.50% 0.88CA Emp Training Tax 0.10% 0.03FUTA 0.80% 0.20

Worker's Comp 5.00% 1.25Liability Insurance 5.00% 1.25Holiday - # of days: 10 4.00% 1.00Vacation - # of days: 15 6.00% 1.50

Total Hourly 33.01

Burdened Hourly Rate*

Let’s Run Some Numbers

• Costs that are monthly or yearly

Per Month Per YearHealth Insurance (ER portion) 550 6,600.00Dental/Vision 125 1,500.00401K Match - Maximum 2,500.00 Cell Phones 50 600.00Office Supplies/Small Tools 100 1,200.00Vehicle Costs 400 4,800.00Overhead per FTE 1,500 18,000.00Others ?



Gross: $25.00

Burdened: $50.61

Burdened with 55% utilization: $92.02

Determine Burdened Cost Per Hour

Total Estimated Hours Paid 2,000 Total Estimated Billable Hours 1,100


Social Security 6.20% 1.55Medicare 1.45% 0.36State Unemployment 3.50% 0.88CA Emp Training Tax 0.10% 0.03FUTA 0.80% 0.20


Total Hourly 33.01

CONVERT TO YEARLY YEARLYHours paid per year 2,000 66,025.00

Per Month Per YearHealth Insurance (ER portion) 550 6,600.00Dental/Vision 125 1,500.00401K Match - Maximum 2,500.00 Cell Phones 50 600.00Office Supplies/Small Tools 100 1,200.00Vehicle Costs 400 4,800.00Overhead per FTE 1,500 18,000.00Others ?

Total Yearly Cost 101,225.00

Total burdened hourly rate 2,000 50.61Total hourly billable cost 1,100 92.02Utilization rate 55%

(*enter amounts in yellow only)



13.Track Employee Utilization

Total number of billable hours

Total number of hours paid

Labor Utilization

Rate



Employee Utilization

How effective are your employees at generating revenue?

UpperLower Limit

Forecast

Last Year

Employee Utilization

• Improve utilization before hiring more staff– Increasing employee utilization will increase

profitability without increasing expenses

• Create an employee utilization goal

• Consider PTO (paid time off), training, production meetings, safety meetings, etc.– 85% may be the highest possible number you can

achieve



Benefits of Increased Utilization

• Increasing utilization increases gross margin

• Increasing gross margin increases – Ability to increase overhead

– Ability to increase net profit

– Ability to grow!

Labor Utilization Varies By Type Of Work

Smaller jobs/service work includes:• Higher overhead for dispatching and billing• Increased time to stock truck for multiple jobs• Increased driving time• Lower efficiency

Larger contract work includes:• Potentially fully productive days• Additional costs for Site Superintendent/Project Manager

Determine where you can more easily improve utilization



Ask Your Employees

• Poll your employees – Where do they see wasted time?

– What can you do to make them more productive?

• Are your most expensive employees doing the most difficult tasks?– Who goes on the material runs?

• Do you need to hire more field personal or help your current crews be more efficient?– Have you considered temporary labor force or more

subcontractors?


14.Utilize the proper accounting software– Software should help everyone better manage the

jobs

– It is not just for taxes or to make the bookkeeper’s life easier

– Do not be held hostage by only one person knowing software

– Consider integrated software to do both accounting and project management



Profit Cycle Requires Teamwork

Estimating and sales to jump

start production

PM’s job description

includes paperwork – so find a a way to make it easier

Bookkeeping for project

management, not just for

easier bookkeeping

Analysis for increased

profitability, not the “blame

game”


15. BEBO – Bill early, bill often

– Create process for accounts receivable collections

– Create process to track and invoice for change orders ASAP

– Accounts receivable is just as important as accounts payable

Bill Early,

Bill Often




16. Take all discounts– Free income

– Improves your bottom line

– Negotiable – call your vendors• Rates can vary

– Track discounts as separate line item • Increase income

• Do not decrease expense

• Do not pass on to the client

Quiz for you…

• If you take 2% discount, what is the equivalent annual interest rate?

2%

12%

36.5%

No idea



Answer

1. Payment terms offered 2%10/net 30

2. # days additional if payment

not taken 20 days

3. Divide 365 by # of days 18.25

4. Multiply step 3 by discount 36.5%

5. Take discount if your cost of borrowing is less than step 4


17.Track ‘money ahead’ and ‘money behind’– Be aware of over and under billings

– Know how much money you have that you didn’t earn – yet!

– Know how much of your own cash you are using to fund your customers’ work



Customer Deposits Can Be Dangerous

• Customer deposits will help cash flow– But …

• Overbillings will overstate profit

• Don’t run out of cash at the end of the job

• What happens when you:– Invoice the client for 100% of the job

– Still have expenses on the job?

• Where is the cash to finish the job?

• It is very dangerous when you need to use tomorrow’s jobs to finish today’s jobs

The Pitfalls of Overbillings

Vo

lum

e

Time

Cash In vs. Cash Out

Cash Out

Cash In

Beware



Underbillings Hurt Cash Flow

• Underbillings mean that you did the work and haven’t created the invoice yet– Are you financing the job?

– Are you paying for all your own overhead costs?

• Growing pains– Growth can cause cash flow problems

– As volume increases, accounts receivable will also increase and cash flow may be tight

– If accounts receivable increases more than accounts payable, cash flow will be tight

Cash Flow Can Fool You

Volume

Time

Revenue vs. Cash Flow

Revenue‐AccrualBased

Cash In

Beware




18. Create system for Internal Controls• Study by Association of Certified Fraud

Examiners– Employee theft costs about $600 billion dollars

annually

• Typical business will lose an average of 5-7% of revenues from employee theft alone– Small businesses (<100 employees):– Greater frequency of fraud– Higher median loss

It’s not a question of “if” but “when and how much?”

What is Stolen?



Other Types of Fraud

• Moonlighting

• Bartering with your clients for extras

• Equipment swapping

• Misreporting time card hours

• Unapproved vehicle and tool use

• Fueling up personal vehicles

• Expense reimbursement abuse

The Fraud Triangle

Opportunity

Motivation Rationalization

Fraud Triangle

The Fraud Triangle was developed by noted criminologist Donald R. Cressey



Good Internal Controls

• “Tone at the Top”– Take an interest in the books– Provide oversight and review– Written ethics policy– Random spot checking

• Segregation of duties– Layers of responsibility– Layers of authority– Limited signatory authority– Extra set of eyes

• Review financial statement accuracy for fraud prevention

Creating controls does not mean lack

of faith butgood business

practices!





Analysis




Strategic Management for Profit

19.Determine the metrics you need to manage your company and manage each job– Create objective (not subjective) measurements

• Create KPI – Key Performance Indicators– Revenue per employee– Employee utilization– Bid/close ratio for leads– Gross margin by job

• Gross margin for material• Gross margin for labor

– Gross margin by type of client• Commercial, residential, public works

Metrics

• Create targets for individuals

• Determine who is responsible for what measurement

• Review as a team

• Great goals from metrics– Hold staff accountable



Analysis

20. Create an Executive Dashboard– Create a one to two page document - No more!

• Look at the forest, then the trees

– Overview for management purposes

– Include everything you need to know

– Include:• Dollars

• Percentages and ratios

• Forecasts

Customize to Your Needs

• Track financials – Cash balances – Accounts Receivables, Accounts Payables– Revenue per employee– Margin analysis– Gross margin and breakeven– Cash flow projection

• Track sales and marketing– Number of leads– Number of proposals– Backlog– Jobs to complete



Customize to Your Needs

• Track operations– Employee efficiency

– Warranty

– Schedules

• Track human resources– Employee retention

– Safety records

• What else do you need to track?

Measure sustainability

Snapshot and ratios

Sample Balance Sheet Dashboard



Measure profitability

Snapshot and ratios

Sample Income Statement Dashboard

Analysis

21. Know how to actually close a job– When do you stop coding costs to a job?

– Determine how you account for warranty costs

22. Compare actual costs to budgeted costs– Review the variance

– Labor has the most risk. Two sources of labor variance:

• Hours variance

• Dollars variance







• Analysis

Strategic management for profit


23.Continue to ask the hard questions– When do I use long term debt like an SBA loan

versus short term debt like a line of credit?

– How many months’ operating expenses should be on reserve in cash?

– I need more capital to expand and grow my business. How can I raise more cash?

– I think we need to hire another employee. What increase in sales would have to occur to pay for this employee?

– Is my pricing strategy correct? Should I subcontract more or increase labor force?



Control Your Overhead!

CEDIA Benchmarking Study

Notice that the COGS was relatively consistent


24. Become a better manager– Distinguish between managing and doing

– Give up the “I’m the only one who can do it right” attitude

– Explore the characteristics of effective leaders

– Become better at conflict resolution



Characteristics of Effective Leaders

1. Leads by example

2. Manages time efficiently

3. Resolves conflict

4. Acts consistently and treats others consistently

5. Motivates others

6. Promotes teamwork

7. Stays positive


25.Use the financial information to analyze the results of past decisions to make better decisions in the future

– Measure margins

– Find your ‘sweet spot’!

– Create an operating budget to make spending decisions

– Create a breakeven analysis

– Delegate, don’t abdicate financial responsibility

– Make informed decisions!




Estimating and sales

Production

Accounting / financial management

Analysis

Strategic management for profit

Only Three Ways to Increase Profits

Charge more

Spend less

Sell more

BEWARE!



Leslie C. Shiner, MBA

[email protected](415) 383-6255

www.ShinerGroup.com

www.facebook.com/TheShinerGroup

Twitter: @TheShinerGroup

Questions and Thank You

A copy of this presentation is available upon request to

[email protected]

This concludes the Continuing Education Program.

Total Estimated Hours Paid 2,000 Total Estimated Billable Hours 1,100


FICA 6.20% 1.55Medicare 1.45% 0.36SUI 3.50% 0.88ETT 0.10% 0.03FUTA 0.80% 0.20


Total Hourly 33.01

CONVERT TO YEARLY YEARLYHours paid per year 2,000 66,025.00

Per Month Per YearHealth Insurance (er portion) 550 6,600.00Dental/Vision 125 1,500.00401K Match - Maximum 2,500.00 Cell Phones 50 600.00Office Supplies/Small Tools 100 1,200.00Vehicle Costs 400 4,800.00Overhead per FTE 1,500 18,000.00Others ?

Total Yearly Cost 101,225.00

Total burdened hourly rate 2,000 50.61Total hourly billable cost 1,100 92.02Utilization rate 55%

(*enter amounts in yellow only)


©2017 The ShinerGroup. All rights reserved

Week of: March 31, 2018

Checking Account Line of CreditConsolidated 235,200 Current Balance 40,000

Available Credit 105,000

Receivables PayablesCurrent 265,400 Current 244,700

1 - 30 126,900 1 - 30 23,80031 - 60 45,100 31 - 60 13,000

61+ 18,400 61+ 43,900

Balance of A/R 455,800 Balance of A/P 325,400

Inventory 68,200 Plus PR Taxes & Other 12,500Prepaid & Other 21,900 Other 0.0

Other 0 Cust Deposits/Overbillings 152,500

Total Current Assets 781,100 Total Current Liabilities 530,400

Current Ratio Current Assets

(Should be > 1.25) Current Liabilities(Higher is better)

Debt to Equity Total Liabilities (all) 785,000

(Should be < 1) Total Equity 910,000(Lower is better)

Company NameFinancial Dashboard

Balance Sheet Items (measure of liquidity)

1.47

0.86


Week of: March 31, 2018

Last Completed Month Year-To-DateCompleted Months 3 3 Months

Revenue 459,100 1,304,000COGS 305,700 848,452

Gross Profit ($) 153,400 455,548Overhead 143,000 350,000Net Profit 10,400 105,548

Average # Employees 28 29

Average # Field Employees 24 25

Gross Margin - % Gross Profit

Revenue

Breakeven Overhead Costs

Gross Margin

Revenue per Emp Total Revenue

(annualized) # Employees

Revenue per Field Emp Total Revenue

(annualized) # Field Employees

Closing Ratio Total # Job Closed 31

(current year only) Total # Jobs Quoted 70

Backlog to be completed in next 3 months 768,000Backlog to be completed in next 6 months 1,410,000Backlog to be completed in next 12 months 2,570,000

Accounts Receivable Turnover:(Higher is better) Revenue

A/R Balance

Days in Receivables 365

(Lower is better) A/R Turnover

Inventory Turnover(Higher is better) COGS

(annualized) Inventory

30

53.79

196,757 179,862

229,550 208,640

44%

12.09

Financial Dashboard

Profit and Loss Items (measure of profitability)

33% 35%

427,975 1,001,870

Company Name


25 ways to increase profits-2 - gocms.informacre.comyear 1 income 600,000 cogs (420,000) gross...

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