Inside the binder I carry to every client meeting is a fortune cookie fortune that reads, “It is a simple task to make things complex, but a complex task to make them simple.”
I don't have a “silver bullet” that would simplify the complexities of running a consistently profitable remodeling company. But there are a few calculations that, taken together, form a “cookbook” you can use to create “what-if” scenarios and better control net profit. And right now, with the fourth quarter approaching, it’s the perfect time to use the recipe.
The cookbook looks forward to future revenue and cash flow needs, and also backward to data that define how the company has historically performed with respect to profit margin, average job size, and sales metrics.
The following definitions and assumptions correspond to the numbered cells in the sample cookbook at right.
1. Overhead. Do not include labor, materials, subcontracts, or anything consumed by a particular job. These are direct costs (Cost of Goods Sold).
2. Owner’s salary. Base this on your personal family budget. (This is part of overhead in a P&L, but remains separate for this calculation.)
3. Increase cash reserves/other. Include the amount you need to bring your cash up to about 5% of annualized volume. Use the “Other” category for balance sheet items not included in regular overhead.
4. Gross profit margin. Use the average from the last few years.
5. Average job size. Use historical data unless you know it will substantially change in the next six months.
6. Close ratio. Appointments to sold contracts; use historical numbers if possible.
7. Leads-to-appointments. Ditto.
8. Cost per lead. Total leads divided by marketing expenses.
Start conservatively and don’t adjust the numbers too much from historical averages. Do the calculations three times: best case, worst case, and most likely. This will help you see which variables most affect the bottom line.
Now, you’re really cooking! —Judith Miller is a Seattle–based business consultant and trainer. remodelservices.com