By REMODELING Magazine Staff. Mike Carden
The largest expense in the remodeling business is employees. You must understand what they cost you annually to know which employee to release when times get tough.
For the most part, overhead expenses need to be paid for no matter what. You may be able to cut back on some of them, but only minimally.
However, if you release an employee with a $40,000 yearly salary plus benefits, you can reduce your overhead by as much as $65,000.
I'm a firm believer in operating budgets. When Anchorage went through a depression in the late 1980s, our business went from $1.5 million in sales to less than $500,000.
The year things got bad, I made three operating budgets. The first was typical but with a few minor cuts; the second left just the basics; the third put us in survival mode -- cutting back on everything but absolute necessities. The survival budget included reducing salaries, cutting company-paid health insurance and vacation pay, selling company trucks, and moving back to our home office.
We started out on the second budget but quickly realized we had to go to the survival budget. Without setting up and monitoring this budget, we wouldn't have made it through. So, my answer to this question is do a budget and figure it out from there.
McEwen/Odbert Construction & Cabinet Co.
I first look hard at my overhead expenses and see if there are any areas I can cut. If we're already running lean, and there's nothing I can cut without losing valuable people or services, I cut my own salary (ouch!).
Letting people go or reducing salaries and benefits is something we revisit often. Over the past three years, we've looked hard at cutting some of our employee benefits, including health insurance and our retirement plan. But it's a question of short term vs. long term -- do I want to risk losing someone valuable for the short-term gain?
There's a fine line between profit and loss. We're forced to constantly examine our business to make sure we are maximizing our profit potential and minimizing our overhead expenses. It's really an everyday question: How can we do it better for less?
If my company hits a rough patch, the first thing to cut is my salary as owner. To me, it seems like an obvious first step. My company is totally dependent upon our employees and our relationships with vendors, so those are the last places I'd cut.
Also, the conventional wisdom is to market when times are good so that when they get tough, the work will come in. I suppose the converse is that when times are tough, cut back on marketing. If you're spending money to grow the company and increase volume, maybe hard times are a sign to tighten up, do what you do best, and not spend the money on expansion.
Cupertino Kitchen Design
We've had to completely restructure and regroup due to the recent turbulent economic times. I started by looking at fixed expenses and how they contribute to the revenue stream and overall profitability. I found one of my locations was contributing only 15% to 20% of our revenues, and its market was not as strong as our primary market. The lack of management focus, combined with overstaffing, further jeopardized our gross profit margin.
We reduced staff and redistributed responsibilities among fewer people. This allowed us to reduce tens of thousands of dollars a month in payroll.
We also looked at fixed project management expenses, specifically the cost of salaried project managers. We decided to work fewer project managers and tie 50% of their labor (rather than 100%) to the production of the job as a fixed expense.
The bottom line is that as the economy scales down, so must the operation.