The first quarter of 2005 is over. Can you answer these four questions that are crucial to your success and prosperity this year?
What volume do you need to produce in 2005?
At what gross profit do you need to produce it?
How much will your overhead run in dollars and percentage of annual revenue?
And how much net profit will your company produce over and above the owner's salary? (I'll give you the correct answer here: 8% to 10%.)
Hang with me here. Don't leave now -- unless you're not sure what some of the terms in these questions mean. Then, run, don't walk, to your accountant and get educated, for you are at high risk for failure.
If you do understand the questions but aren't sure of the answers or have to guess at the answers, let me introduce you to a document that will become your strongest business ally: your annual budget.
Map It Out
Repelled by the idea of a budget that will question whether you can buy a new picture for behind your desk or a sexy new piece of cabinet shop equipment? What if I told you that your budget was actually your plan for profit?
That is exactly what it is -- your roadmap to how your company plans to make money in the year ahead. It does for your company what your carefully considered estimate does for an individual job -- projects what it is going to cost to run the company, pay personnel, and generate those critical extra monies, or net profit.
At our company, we sometimes use a very quick gauge to help remodelers get started on the budgeting path. We call it the ProfitFirst System, and it begins with the net profit end in mind. It gets you used to manipulating some of the key figures in your company until you find a mix that works for you.
There are seven steps, and if you don't like the answer you get on No. 7, keep reworking the whole formula until you see a markup and volume you are comfortable with.
1. Determine your desired net profit in dollars. As owner/ investor what should your return be? What return could you get elsewhere? What are your risks?
2. Calculate a reasonable and realistic production volume for the year. We often talk about sales for the year as though that is revenue, but your operation is really paid for by production -- what you've actually earned.
3. List your overhead costs to produce the above volume, including your salary if you are not a direct job cost.
4. Figure out how much gross profit in dollars you will need.
No. 1 + No. 3 = gross profit
5. What should your job costs run in dollars?
No. 2 - No. 4 = job costs in dollars
6. What should your job costs run in percentages?
No. 5 divided by No. 2 = job costs in percentages
7. What will your markup need to be on jobs if you use an across-the-board markup on job costs?
No. 1 divided by No. 6
By manipulating the answers to these seven questions and working backward from your net profit goal, you will find a scenario that fits your company. You are now ready to do a real budget or plan for profit.
Linda Case, CRA, is founder of Remodelers Advantage Inc. in Fulton, Md., a company providing business solutions through a network of experts and peers. 301.490.5620; email@example.com; www.remodelersadvantage.com.