New Year - Bigger Profits, Better Systems
It’s 2020 already! Time flies! Are you keeping up with your resolutions? I am! One of my resolutions is to help as many business owners as I possibly can this year. So I thought I will write a blog post outlining all the strategies that have been helping my clients in 2019 to save money, save time and pay themselves more. This way you may get some good idea to implement in your business and make 2020 the best year yet!
1. Increase profits by increasing Revenue and cutting Expenses.
If you want to increase Revenue you know that you either need to increase the volume ( I am still trying to work on those marketing skills) or recalculate your markup to include your overhead and deliver the right margins.
When it comes to cutting expenses, look at your bank statements and financial statements often. At least once a month go through all the expenses and see how you can decrease them by 5-10%. Are those unnecessary subscriptions adding up or do you need to talk to your vendors and contractors because your Cost of Goods Sold/Job Costs are going through the roof. Always ask yourself: “DO I really need this?” And if the answer is YES, then ask yourself: “What would I do if this wasn’t available?” And trust me you would come up with all sorts of ideas on how to get the same for less.
Consistently look for ways to lower your fixed overhead.
Eliminate non-strategic expenses that just don't add value to the company or to the customer.
2. Build Good Estimates
Creating a detailed, accurate estimate is the first step toward achieving real profitability—yet too many contractors fail to calculate the true cost of a proposed project based upon three essential elements: overhead, risk and job costs.
Overhead. Think of overhead as the costs that would remain even if your crew didn’t do any work for a week. You would still need to pay insurance, rent, and utilities, etc.
Risk. It is important to include risk factors in each estimate—a “contingency” line—rather than just padding here and there.
Job Costs. Labor can be the riskiest and most difficult part of the estimating process. Without understanding the true productivity of your field staff, you cannot create accurate and reliable estimates.
3. Address Payment Issues and Get Paid on Time.
No one wants to work only to get paid late or even not get paid at all. Knocking on doors and beg to be paid for the quality job performed is the last thing anyone wants to waist time on. And yet, payment issues are very frequent in the construction industry for a variety of reasons.
Have a complete contract written up for each of your client specifying the terms and conditions of your engagement. Outline the penalty for being late on the payment.
Request deposits and progress invoicing. This will help you cut expenses like late fees on your credit cards and interest on your lines of credit. You don’t need to be drowning in debt, your customers should fund their own projects.
Don’t wait to send the invoices, do it the minute the agreed part of the project is completed. If you do not send receivable invoices in a timely fashion and fail to follow up on them, you’ll quickly find you don’t have the cash to take care of the bills.
Better management means better cash-flow—taking you a step closer to running a more profitable business. Check out the article that I wrote for Levelset about the cash flow management:https://www.levelset.com/blog/where-is-all-my-cash-cash-flow-management-strategies-for-contractors/
4. Focus on Productivity.
It is important to have a good time management guidelines for you as a business owner and for your team.
The more productive your crew is, the less of a chance that they'll miss a deadline or make a mistake that could cut into your profit margins. Train your team well and make productivity everyone's focus. They can be your eyes and ears on the ground, so to speak, and they may notice problems that could cut into your profit margins long before you see them.
Take advantage of new technologies.
There are plenty of time-consuming processes behind the scenes that will benefit from automation. These processes have a major impact on your margins and profitability and leveraging new technologies to make these processes efficient, you can do more work that actually makes money.
There are three types of software that has helped my clients with productivity:
Quickbooks Online or Desktop
2. Project management software:
3. Internal communications software
5. Pay Yourself, You Deserve It
Now, just to be clear, if you work in your business in ANY capacity, salesperson, manager, installer… anything, your net profit is the number AFTER you have paid yourself a reasonable salary. Too many contractors mistakenly think they are making money when they really just have a job.
Remember, your business exists to serve YOU and your family first; the only way it can do that is if it produces a profit. So, take some time now to examine your NET profit and ask yourself - am I producing enough?
6. Track Job Costing and Review Your Numbers Regularly
Managing for profitability requires keeping an eye on projects both while in progress and upon completion. An accurate construction accounting system must distinguish between overhead costs and direct job costs. You must also be able to systematically compare your budgeted costs to your actual job costs to measure estimating effectiveness, labor productivity and the price and use of materials. If you notice any inconsistencies in budget vs actual numbers, you can then create an action plan to address these shortcomings and improve your profitability on future projects.
Change orders. Too many contractors lose money on change orders because they don’t systematically track costs and don’t take the time to bill for the change work they perform. Don’t let change order to go unaccounted for.
You should also review your main financial statements Balance Sheet and Income Statement at least once a month. This way you will stay on top of your performance and will spot the problem fast.
7. Consider General bookkeeping practices when doing it yourself
I have been doing some training in Quickbooks Online for business owners and their spouses and here are some tips for better bookkeeping practices:
- Maintain daily records. If you don’t have time to do a little bookkeeping each day, when will you find time to record a month’s or a year’s worth of records?
- Don’t over-categorize. When categorizing expenses, don’t make it harder than it needs to be. Match transactions from the bank feed, don’t create double transactions.
- Keep separate accounts. Have a separate checking account and credit card for your business. This way you will you be able to track expenses more efficiently.
- Save all Receipts. The IRS requires you to keep all the receipts in case of audit and it is a good practice to make sure that you are not losing potential expenses that can be written off.
- Properly classify employees. The proliferation of independent contractors, consultants, and freelancers has made it difficult to determine who is on staff and who is not.
- Use Bookkeeping Software. Trying to do all of your bookkeeping tasks by hand can be a major pain in the butt and we don’t recommend it. Using software will make your life a whole lot easier and will streamline the bookkeeping process.
- Budget for your expenses. Planing ahead of time for is key to keeping your business profitable year-round. Creating a budget will help you manage your cash flow during each season of your business.
I hope these tips have been helpful. As usual let me know if you have any questions, I am here to help!