By adjusting overhead, gross profit, and net profit targets, you can build budgets for several scenarios, depending on the volume of work you think you can sell and the total compensation you need to earn.
By adjusting overhead, gross profit, and net profit targets, you can build budgets for several scenarios, depending on the volume of work you think you can sell and the total compensation you need to earn.

It’s been a tough year and, unless you’re one of the lucky ones, 2010 doesn’t look much better. This makes budgeting for next year a challenge. To cover all expenses, pay yourself, and leave a bit of profit, you only have a few options: increase sales, cut overhead (again), or reduce owner’s salary. I’m going to bet that none of these sounds too appealing right now. There is another choice: Reconsider your company model. Times are changing, but as I mentioned last month, there are a few proven ways remodelers can succeed, assuming that they are established in business, are known to their community, and have a decent reputation. Setting aside specialty operations for the moment, the three I encounter most often are:

  • Craftsman model. The owner works the jobs for 30 billable hours per week, 48 weeks a year at an hourly wage between $30 and $100, depending on the market and individual expertise. Adding in markup on materials and subcontract expenses, these companies can produce between $50,000 and $250,000 annually in total owner compensation.
  • High-margin model. These predominantly design/build companies work at high gross margins (35% to 45%), and can produce up to $1.5 million annually for the owner, again counting both salary and profits.
  • High-volume model. These companies work with architects and at lower margins. They do both fixed-price and time-and-material work, and can also produce up to $1.5 million for the owner.

Risky Business

So, what’s the difference? It’s all in the risk.

The craftsman depends on his health and his ability to be productive in a physically demanding job. He has to be constantly on the lookout for the next opportunity as the current job winds down.

The high-margin company increases margins through steadily improving reputation and branding. But overhead increases, too — more administrative staff, more sophisticated systems, more training, and more office space. High margins also require increased marketing budgets to generate more potential clients.

The high-volume company depends on a steady volume of sales. When margins are tight to begin with, any reduction in number or size of jobs takes a bite out of gross margin. Thin margins also require adept processes. Work won through competitive bids requires efficient estimating systems, and there is less room for error in accounting systems.

Finding a Fit

So how do you protect your company in 2010? Should you reduce margin to win more jobs, but become more vulnerable to market fluctuation? Should you maintain margin and hope that client satisfaction will help cover overhead? Or should you cut all the way back to a craftsman model, with its long hours, physical demands, and uncertainty about the future?

Only you can answer the question. The sample table LOCATE can help you to “right size” your company. (To download the spreadsheet click here .) Try several scenarios and evaluate how each affects sales volume, gross margin, overhead, and personal financial needs. The results should give you a good Plan A, plus Plan B and Plan C as well.

—Judith Miller is a Seattle–based remodeling business consultant and trainer. Visit her blogs at remodelingmag.com and at http://remodelservices.wordpress.com.