The Design Builder's Blog

5 Success Limiting Actions Contractors Should Avoid To Maximize Long Term Profitability

Having grown my own contracting business and worked with hundreds of business owners seeking to do the same I have come to recognize five specific things I think dramatically limit a business owner’s success and potential long term profitability.   If you plan to grow your construction business deciding how you will address these five actions can set you on path that is more likely to support your long term professional and personal levels of success. 

Not having an exit strategy

If you have no idea where you want to end up any path will take you there.   On the other hand if you think about where you want your business to be in 10 to 15 years, and what role you as the owner want to have then, it’s more likely the decisions you make along the way will support and maximize your ability to get there.   Consider going down the wrong path will eat up a lot of value time and money that could have been used to help grow your business and will reduce your potential retirement funds.

Hiring for today without thinking about tomorrow

Many contractors hire for today.  By that I mean they hire the help they think they need for the projects they have on the books and the current size of the business.   If you plan to grow your business these employees may not have the skills or desire to grow with the business.   If you think about how much you want to grow, the organizational charts you will need at different stages of growth, and the job descriptions for each position on the organizational charts, you can make better hiring decisions.   And, long term, you will have less employee turnover and therefore lower training related expenses over time as well.

Not setting goals and metrics

Letting your business grow without having measurable goals along the way can lead you and you’re your business down a path to mediocre results.  Without a goal for example for work produced and sold per month you won’t have an objective target to hold you and your employees to as business happens.   Without goals and metrics the business may just accept whatever level of performance happens by chance.  On the other hand, by having established goals that need to be answered to, if you come up short of your goal in one month the new goal for next month can be increased to make up for the shortfall and get you back on track.  Knowing you are behind on your goals you and your team can make alternate plans and the changes required to catch up.

Not establishing your target customers and project types.

Being the” Jack of All Trades” to everyone who calls your business may work for a self employed handyman or carpenter, but that’s not a good strategy if you want to be a construction business owner with a growing business.   Deciding your niches can help you streamline and personalize your business systems so they serve both your business as well as your customers in a consistent and reliable way.  For example becoming a Design/Builder may limit who will do business with you, but on the other hand making a commitment to that business delivery method you can develop a marketing and sales process that generates the qualified leads and sales you need and will help your business become known as a Design/Build expert in your desired target market area.  My own experience made it obvious to me that consumers are willing to pay more for experts than they typically will pay for a “Jack of all Trades”.

Not getting the professional help you and your business need

Successfully growing a residential construction business is not easy and takes time.   If you go it alone you will likely attend many sessions at the “Lumberyard School of Hard Knocks”.  That educational institution can be expensive, frustrating and may require you scrap a lot of what you have done in your business because it will no longer work well enough as you grow the business.  With the right professional help and guidance you can reduce the overall long term cost of your path to success and you can get there much faster.   Considering the principle of compounded interest, the more profit dollars you earn and keep each year along your path, the bigger your nest egg can be when you are finally ready to exit your business. 

A final thought

If you find and work with the right construction business coach and or mentor your investment of time and dollars working together can have tremendous ROI.  Just make sure he or she teaches you to fish so you and your business won’t become dependent on their assistance to stay in business. 

Let me know if you want my help.

3 Financial Myths That Compromise a Contractor's Long Term Success

Here is my list of the top three myths I see that compromise a contractor's ability to achieve long term financial success.  These areas definitely affect a contractor ability to profitably grow a business, as well as the contractor’s personal financial health, including retirement funding.

I must be competitive with my pricing

In my opinion when any business seeks to be competitive it typically becomes a commodity.  By that I mean the buying public looks at that business and or it’s offering as being the same as their other choices.   When consumers see a product or service as a commodity they ultimately make their choice between available options based on price.   By trying to remain competitive contractors playing in this sandbox become bidders in a reverse auction where the loser is the one who wins. 

To prove my point, ask any contractor who sells their services through a bidding process if they will have the money they need to comfortably retire at 65 without working again.  There will be some exceptions, but I bet the majority will tell you their plan is to work until they die.  What would their significant other say about that plan?

Also, keep in mind that nine out of every ten contractors will eventually fail.   By being competitive contractors are most likely joining the ranks of contractors who will eventually fail.   Rather than compete, why not differentiate your business?   Check out an article I wrote on this subject for Remodeling Magazine

I can't raise my prices; I'm already the most expensive contractor in my market.

I hear this one all the time from contractors.  Most of the time it comes from contractors who have no idea of their true cost of doing business and guess at what markup to use.  This is referred to as the WAG method, or the "Wild Ass Guess" method.  Based on the fact that they are guessing at what price they should charge I would also suggest they are guessing about being the highest price in their market.   Did they do or hire someone else to do market research to back up their claims?  I doubt it. 

When I ask how they know they are the most expensive most contractors tell me their prospects are the source of their assumptions.   For those using their prospects' feedback to determine their price point in the marketplace remember, buyers are liars.   The 11th commandment states that you can lie to a sales person and still go to heaven!

One of my contractor coaching clients told me he was the most expensive in his market and would not be able to sell anything if he raised his prices.    After I helped him do his first business budget and determine the markup he needed to use to cover his true overhead costs and make a profit, he went out that night and closed a deal at his new higher pricing.  Check out this article I wrote for remodeling magazine about the benefits of having confidence in you numbers.

I can only charge what the market will bear

Now, if a contractor has done market research, for his or her local market, this may be true.   Savvy contractors, those who know what price they need to charge, will sell at higher prices up to the point that a majority of protects stop buying.  I would consider this to be true market research.  However, these business not only know how to determine the true costs of doing business, they also typically have professional marketing programs to help them get in front of specific prospects and they employ professionally trained salespeople who know how to sell.

Contractors using the WAG method to price their work also typically do not have a strategic marketing plan.  Without targeting a specific market of customer types, how can a business owner know what price point the market will bear?  Without professional sales skills, how would a contractor know if the reason for not selling at higher prices is due to the market or to his/her selling skills?

Also, what market are they referring to; the one they are proactively pursuing or the one that randomly ends up knocking on their door?  Are they using professionally trained sales people or are they using order takers?   One way to differentiate between sales people and order takers is that sales people present their solutions in person.  Order takers typically hit send.   If you use the hit send method I don’t think that counts as a valid way to test what the market will bear.

Want to be able to charge more for what you do? 

Check out this blog about why some contractors can raise their prices but most can’t.

Looking to target specific customers and work types?

Check out this all day Marketing and Sales Workshop

Why Some Contractors Can Raise Their Prices But Most Others Can’t

If you are a contractor or remodeler who has been selling on price to close work, you may have a difficult time raising prices as the economy improves.  I say this because as a result of selling on low prices during the recession you may have created a "low price brand" image in your marketplace.  Referrals and prospects who know about your brand will be expecting low prices and will not buy from you if your prices are higher than they experienced and or were told by your referring past customers. 

Can, will you, rebrand your business?

Perhaps by selling on low price during the recession you have doomed yourself to remain there.  You can of course re-market your business to create a new brand, but that will take a whole new strategy than you have used in the past, and it will also cost lots of money.  Keep in mind it will also take much longer to replace or correct a brand than creating the right brand from the get-go.  Rebranding may not be an option if your low prices didn’t or doesn’t generate enough gross profit to pay for doing it.

Also, if you’re a great carpenter without any real professional sales training and sales skills, you will probably not have much luck raising your prices because you don't know how to sell to begin with.   Think about it.  That lack of sales training is probably why you had to drop your prices during the recession just so you could sell something.

And, if you are a contractor who relies almost exclusively on referrals and word of mouth, and don’t do any marketing, you are not likely to get enough leads to take the risk of raising your prices.   

Why some contractors will have success raising their prices

However, those contractors with great marketing and sales skills, those who charged enough during the recession to bring in the gross profit dollars needed to keep doing and pay for great marketing and sales systems at their business, are in a great position to raise their prices.  When a contractor does strategic marketing, and does it well, that contractor gets far more quality leads than the business needs.  If you have more leads than you need you can typically afford to take the risk of raising your prices because you can afford some “no’s” when you have plenty more leads to pursue. And, if you have professional sales skills the risk isn't as great.

So, here’s my advice if you have been selling on price

• If you are close to retirement, say less than 3 or 4 years to go, don’t bother.  The investment needed to fix your problem will require both a lot of money and time.  Any marketing strategy can take at least 6-9 months before you will see quality and sustainable results.  And that’s if you do it right.  If you try to do it yourself through trial and error it could take much longer or might never make enough of a difference before you are ready to retire.
• If you plan to remain a small company, only worried about generating enough work for yourself and maybe one other worker, I suggest you work really hard creating and nurturing referrals.   This is a good low cost option but it does take a lot of your time.  You’ll need to spend time calling your previous customers to let them know you’re still around and would love to get more work from them.  I suggest you also let them know you would appreciate their referrals.  While you have them on the phone get their email addresses and permission to send them information about your company via email.   If you can do this you can take advantage of low cost email marketing strategies to stay in front of them and remind them about referring you.  If this works for you and you get enough quality leads, you will also need improved sales skills so you can raise your prices and still sell enough work.   If you can pull off selling at higher prices use the money to expand your marketing strategy beyond the email related tactics.
• If you have a business that is already doing at least $500-700K worth of business, but you are not making enough money, I suggest you find a coach and or a mentor who can help you.   For a business of that size you really need the help of a pro who can help you strategize what to do before you do it.  My experience working with contractors in this position is that there is typically much more to fix than the marketing and sales functions of the business.  The most common challenges I see with these businesses is a lack of understanding of the costs of being in business and how to properly price projects so they include the money needed to pay for things like marketing and sales training.  Sure, it will cost money to hire that person.  However, if you hire the right person to help you he or she can really speed up the process and help you control the cost of doing it.  The right person will also be able to refer you to other resources you need will to make the changes.   On the other hand, if you try to do it all on your own, you might just end up right where you already are.

 

• My last suggestion is for those contractors who won’t do any more marketing and won’t improve their sales skills.   If this describes you and your business I suggest you consider the option of getting out of the game before it’s too late.   As the economy improves savvy and committed business owners will be doing what it takes to beat out and even eliminate their competition for the high margin customers and projects.  If that happens in your market you will need to stay selling on low price.  My experience working with contractors in this mindset has shown that these contractors often live from check to check and most will never be able to retire.  I suggest you consider the option of a job at a company that already does good marketing and knows how to sell.  These businesses will be growing as the economy improves and will need the talents of good carpenters and project managers.  If you find the right company to work for you will probably make a lot more money, have a whole lot less stress in your life and your new job might even include a company sponsored retirement plan. 
  

Some final thoughts

If the survival of your business has been a constant battle and or struggle for you, deciding to proactivily change what you do, rather than waiting to see if your business can make it or not, might just be the best option for you and those you care about.  Changing what you do can include working on your business or seeking a job opportunity.   Either option is a good one, you get to decide.

Related article:

11 Common Traits of People Who Buy Remodeling On Price

Three Good and One Bad Reason to Offer Profit Sharing Rather Than Bonuses

Often, employees expect to receive a bonus around Christmas time because they have in the past.  When the economy was good and businesses were making money, it was easy and felt good for the employer to give out bonuses.  And, employees typically feel if they worked hard they deserve a bonus.  The problem with that method is that in tough economic times when profits are small or even non-existent, the employees still expects bonuses.   Employers who put themselves in this position can be extremely challenged trying to explain why they are not giving out bonuses even if employees had been working really hard.  To avoid the the challenges that come with bonuses remodelers can consider offering profit sharing instead.

Employee Bonuses vs. Profit Sharing; What’s The Difference?

Profit sharing can be used and offered for a variety of reasons.  Profit-sharing plans can be a great way to improve and keep employee morale, loyalty, and retention up.  They are also a good way to motivate employees in participating in earning and protecting company profits because as part of the plan they have a vested interest in doing so.    

Three Good Reasons to offer profit sharing

Reason #1: Some profit sharing plans have to do with creating retirement plans for employees.  Remodelers who have the ability to offer such plans can take advantage of them to attract good employees.   Most remodeling businesses do not offer retirement plans, so if yours does you might be able to grab the “cream of the crop” to enhance your team.  Also, properly designed profit sharing retirement plans can even help keep employees working at the business long term by including a vesting schedule that requires the employee to be at the business for a certain amount of time before all or portions of the money shared becomes theirs.   If you would like to use this type of profit sharing plan one of your first decisions should be whether to set up the plan yourself or to consult a professional or financial institution for help with establishing and maintaining the plan.  I recommend getting help due to the complexity of legal and tax considerations.

Reason #2: A smart remodeling business owner understands that employee performance is tied directly to how vested they feel to the company they work for. Because they can be a powerful incentive for employees to work harder for the company many remodelers are now beginning to consider profit sharing plans.  By sharing profits earned the plans benefit both the business and the employees.  Employees gain a sense of satisfaction from knowing they'll all get a cut of the profits.  For the business, it's also likely that the added productivity will increase the overall financial performance of the company.  Basically, if the business earns more profit, and the amount shared back with employees is less than the extra amount earned, sharing some with employees is a no brainer.

Reason #3:  By creating and offering a profit sharing plan a business can change the culture from "let’s just get it done" to how do we get it done and maximize profits at the same time.  As long as employees have a way to understand how profits are earned and can then measure how their efforts impact the company’s bottom line, the business can create a culture where the entire team feels and believes “we are all in this together” and everyone involved is focused on profit.   An additional benefit of such a culture is that vested employees start holding other employees accountable to contributing towards profitability.

Now the bad reason...

The success of a profit sharing plan lies in the details.  Many remodeling businesses struggle to determine a good profit sharing strategy, often because the business and or the business owner don’t fully understand how to predict and or measure true profitability.  If the business or the owner doesn’t understand the profitability concept, it’s also likely that the business’ financial system is not adequately setup to accurately measure profits.  The business' financial system should also be set up to provide reporting in a simple and easy to understand format so as to help both the owner and employees determine the amounts that will be shared. 

When an inadequate financial system exist results can include:

• The owner struggles to explain the plan to employees
• Employees struggle to understand the plan
• Employees are challenged to understand how they can actually affect profits
• Employers and employees can’t reliably measure the effects of their efforts

When some or all of the above happen:

• Employees lose trust in the employer
• Employees lose motivation to participate in the plan
• Good employees looking to share in the profits leave the business.

If your business doesn't have an adequate financial system, or you and/or your managers don't understand your financial system, it might do more harm than good to offer a profit sharing incentive.  That being the case maybe its best to stick with using bonuses where the business and or the owner can decide the criteria for how often and how much an employee gets as a bonus.

Need help?

If you’re looking to start a bonus or profit sharing plan at your remodeling business give me a call or shoot me an email.   I can help you develop a plan that works for your business as well as your employees.  Businesses that share profits often earn more profit as a result!

Employee Bonuses Vs. Profit Sharing; What’s The Difference?

Every year a good number of businesses give their employees bonuses right around the first of the year, often right at Christmas time.   Other companies offer profit sharing, typically distributed around the beginning of the New Year, but after the business has had time to review their accounting and access true profits for the previous year.  It’s important for both businesses and employees to understand the difference between the two.  

Let’s define and look at some of the differences between a bonus and profit sharing. 

Employee Bonus:

Bonuses are compensation for employees for work performed; they are paid in addition to salary or wages.   Often business owners give out bonuses without any structured plan or objective method for determining the amount or even how the bonus can actually be earned.  Although typically given out around Christmas time, bonuses can be given out any time of the year.  

Bonuses are typically used and are a good way to recognize special efforts or performance by individual employees.   For example if an employee comes up with a good idea that saves the company a lot of money and or time, that employee might be given a monetary bonus as a reward.   The amount of the bonus is typically left up to the employer, but can also be based on some type of pre-established formula where the employee gets a certain percentage of the actual savings.

Bonuses are considered compensation if (per the IRS) they "arise out of an employment relationship or are associated with the performance of services." Bonuses are considered taxable to the employee and are considered an expense of doing business.  In most cases, bonuses are a tax benefit to the employer.

Profit Sharing

Profit Sharing is an arrangement between an employer and an employee in which the employer shares part of its profits with the employee. The key difference between a bonus and profit sharing is that there must be profit before any is shared with the employee.  

As payment under a profit sharing plan, employees can be given stocks or bonds, or cash (cash profit sharing plan).  If the profit-sharing dollars are part of an employee's retirement plan (deferred profit sharing plan), they are received at retirement rather than now, and depending on the retirement plan they may be tax-deductible. There can be eligibility requirements for profit-sharing plans.  For example, the employee may be required to work for the company for a certain period of time before he or she can partake in profit-sharing.

Three Good and One Bad Reason to Offer Profit Sharing Rather Than Bonuses

Other Business Considerations:

Keep in mind that depending on how a bonus or profit sharing is distributed the employer may incur additional costs over and above the dollar amount given to the individual employee.   Depending on the employment relationship the company has with the employee, the business may incur the expense of payroll related taxes, liability insurance and/or workers compensation insurance on the dollars paid to employees.   Its best to consult with your accountant regarding the total cost of offering a bonus or profit sharing plan before discussing with or offering either to employees.

Also, it’s a good idea to let employees know they too may have to pay payroll and income taxes on any bonuses or profit sharing they receive.

Need help?

If you’re looking to start a bonus or profit sharing plan at your remodeling business give me a call or shoot me an email.   I can help you develop a plan that works for your business as well as your employees.  Businesses that share profits often earn more profit as a result!

How Remodelers Can Make More Money; If They Have Good Cash Flow

Making more money as a remodeler

As a remodeling or Design/Build business grows, managing cash flow becomes extremely important, maybe even critical to continued operations. The business owner or manager soon becomes a money manager by default. As this happens, there may be opportunities for the business to earn more money by using the money it already has in a strategic way.

Good cash flow is an assumption of my suggestions

Many Design/Build and remodeling companies put all the money collected from sales in one checking account. The funds are then used to pay for the expenses of producing projects (direct costs) as well as the operational costs of the business (overhead). Typically businesses leave any excess of money (net profit) in the same account as well.  If this is how your business is operating, meaning you actually have excess funds to contribute to profit, you have what can be referred to as good cash flow.  If this isn’t happening already at your business I suggest you stop reading this blog and read this one first.

Accrual accounting can help you predict excess funds

If the business’ financial system includes the ability to predict income and expenses on a monthly basis, the cash flow needs for that month can be easily determined in advance. Any excess of cash that would normally remain in the account could also be anticipated and create an opportunity to earn additional profits. In order to actually qualify what is excess cash over and above monthly expenses, the accounting system should be run on an accrual basis, not a cash basis. By using the accrual method of accounting, expenses are recognized as they occur, even if the expense has not yet been paid for. Income is recognized when the customer is billed, even if payment has not yet been received.  Income and expenses are then tracked by the exact day they are to be collected or are due respectively.  By tracking the income and expenses in this way, one can easily predict the money that will be owed at a certain given time as well as how much money will be available to pay for those expenses at the time the expenses become due.

You will need a second account for your money

If your accounting system predicts you will have excess funds, consider opening a second interest-bearing account where any excess monthly funds could be deposited.  The amount of interest this second account could earn depends on how long the money will stay there. Typically, the longer the commitment to leaving the money in the account without having to access it, the higher the interest rate a bank would offer. Interest rates on these account types may seem low, especially in the current market, but over the course of a year a significant amount of money you wouldn’t otherwise earn could be added to your bottom line.

I also suggest that this second account and your primary business account are with the same bank. By working with the same bank, transferring of funds between accounts can be instantaneous. There will be no need to wait for checks to clear between banks. Also, most banks now offer electronic banking using the internet. This can eliminate the need to even leave your office or the job site when making transfers between accounts. On-line banking services can be used to be sure the money is actually available in a “just in time” fashion.

A word of caution!

Before you consider using any of my suggestions, be sure they make sense for you and you understand the legal and or tax implications for you and your business.  I suggest that you always be sure to consult with your accountant, tax adviser and or other appropriate counsel before trying any new strategies, including those described in this blog.

If you have been use this or a similar strategy, be sure to share your experiences in the comment section below.  Other remodelers and Design/Builders looking to earn more money could benefit from what you have to offer!