There is that well-known joke: How do you make a million dollars in remodeling? Start with $3 million!
Well, we’d rather make money in this business to fund the life of our family, our employees’ families, and future growth for the company.
The simple (but not easy) answer is to just live within your means, from a business perspective. If you believe that you can only earn $50,000 or $100,000 in gross profit, then you have to use only three-quarters of that in overhead including your salary. Another way to put it is: Consistently take in more than you spend.
It just won’t happen unless you believe that making money involves even more than satisfying clients and building beautiful projects. It also requires good financial management of your company. That means you must watch the piggy bank — in other words, understand and focus on those all-important financial reports.
A financial “loop” involves making a financial plan, monitoring that plan by gathering information in a useful format, adapting your actions to straighten out any variances, then gathering information, etc. There are two key financial “loops” in your business: the big-picture loop, which is about the overall company operation, and the smaller-picture loop, which is about job costs.
The Big-Picture Loop: Here you are creating a feedback loop that includes the development of at least one operational budget for the year that includes:
- Your realistically anticipated volume
- Your gross profit percentage
- A line-item budget for your overhead
- And a net profit of 8% to 10%
Broken down into monthly numbers, this constitutes your plan. By comparing monthly budget to actual expenses in a P&L, you can take quick action if you are getting off track.
The Small-Picture Loop: This is all about estimating and job costing. Some jobs will perform well, some not. Successful remodelers consistently bring jobs in within 2% of estimates, but only in the aggregate — some jobs may still be over or under estimates.
Here again, to make money you need a plan (your estimate), feedback to that plan (job cost reports at least biweekly), and analysis of the causes for any variance to plan. Finally, what changes are needed? Do we need to adjust our estimating or make a better handoff from sales or produce the work more efficiently?
The Result: Creating and maximizing these two loops in your company allows you to adjust operations to land that company plane on the carrier deck of profitability. Without them you are flying blind.??
—Linda Case is founder of Remodelers Advantage, a national company that gives remodelers the tools to achieve profitability and success. 301.490.5620. firstname.lastname@example.org
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