By now your 2009 budget should be nearly complete — how does it look? Are you making the money you, as owner, need to make? Are you protecting the company’s future by building in sufficient net profit (after your salary) to build up the cash account for the difficult months ahead? Or do you still need to make some cuts so that all the numbers come out right?
Let’s figure out where some of the greatest cost savings might be by drilling down into fixed and variable costs, looking for those changes that are relatively easy to make.
Fixed vs. Variable Costs
Fixed costs will be relatively stable throughout the next year. You’re probably already pretty sure, for example, what your office expenses will be. There might be some savings in heating and cooling costs, depending on how energy prices fluctuate, and you may need to adjust behavior to keep costs in line. And you can keep office supply and telephone expenses under control through careful purchasing. Beyond that, if you still need to cut, you might consider moving the office back into your home, which many people are doing.
Variable costs change in two ways: either with the amount of work being done on the jobs (these costs are all included in Cost of Goods Sold or COGS — see Benchmark, February 2008) or with changes to the way the company operates, expenses for which show up in overhead (see Benchmark, March 2008).
Because COGS makes up between 60% and 75% of all costs incurred by a remodeling company, this is the first place to start digging. Good estimating is essential for cost control, but to move beyond that to cost cutting requires a closer look.
Materials. Here are three high-impact ways to reduce materials expenses:
Reduce trips to the lumberyard. Use a 2-week/1-week/2-day look-ahead process that identifies what’s needed on site. Order on Friday for Monday delivery.
Measure twice, cut once. Train field employees and estimators to be precise in all measurements, whether with as-builts, door and window openings, or trim cuts. The savings in reduced waste alone can account for 1% of total costs or more.
Track expensive items. Develop a purchase order system for special-order materials, including lumber, plumbing and electrical fixtures, and doors and windows. These should require signoff by both your company representative and the supplier. Cross-reference prices against the original PO upon receipt, but don’t substitute quality for price. Your company sells quality, and now is not the time to accept second best.
Trades. Negotiate with trade contractors to get the best price in exchange for continued work and prompt payment. Then develop a PO system for their contract price to control against missed or unauthorized change orders.
Labor. This is both the most difficult and the easiest place to cut some expense. The hard part is cutting personnel, particularly if everyone is a good producer. In fact, because your field people produce the work, cutting field positions is not necessarily the first place to look. Instead, try asking your employees how each of them could reduce the total cost to the company in the short run. Switching to four-day weeks, for example, will save on set-up and clean-up costs; switching to biweekly payroll will reduce office overhead. By asking for suggestions, you not only achieve buy-in from everyone, but sharing the load ensures that the good people you want to keep will be there when the inevitable rebound occurs.
The easier labor cuts are on the benefits side. Use this Labor Burden Calculator to help you through some scenarios that reduce overall labor costs.
Other. This category includes such expenses as permits and fees related to the project. Most of these cannot be reduced, but be sure to charge the client for all contractually defined expenses.
Still need to shave a few more percentage points from your budget? Next month we’ll look at overhead costs. We’ll beat this yet!
—Judith Miller is a Seattle–based remodeling business consultant and trainer specializing in accounting, finance, and computerization. Visit her at remodelingmag.com under the ExpertOpinion tab, Blogs, or at http://remodelservices.wordpress.com.