As the owner of Acton Construction, in Campbell, Calif., Stan Acton uses various spreadsheets to help him capture and interpret information to run his business. His newest spreadsheet has made a dramatic difference in the way he looks at the projects he accepts.
The capacity of his production team was holding Acton back from increasing net profit. His three in-house carpenters were good at their jobs, but they could only work so many hours in a year. “We’re getting plenty of work now and could grow with more carpenters,” Acton says. “But it’s hard to find the superstars we want in this market.”
Work With What You Have
So he took a different approach. “Instead of spending hours [to hire and train] ... new people,” he says, “we’re focusing on using our existing human resources as efficiently as possible.”
His first step was to create what he calls, the “Production Capacity Limited Model” spreadsheet, which helps identify jobs that are producing the most gross profit per production hour. He then uses that information to select or deselect potential projects.
To start, Acton determined the total number of production hours available to the company with its current staff: three staff members, each working 1,800 hours per year, give Acton a total of 5,400 production hours with which to produce his company’s gross profit.
Then he filled in the spreadsheet (see sample, below). The fewer in-house hours needed to produce a job, the greater the gross profit dollars.
A straight gross profit percentage does not necessarily translate to the highest levels of gross profit per production hour. Since Acton only has so many production hours, he has to maximize the profits that are produced each and every hour.
Acton uses colors on the spreadsheet to identify the profitability level of each job. He says, “Now that I have the information in front of me, I know that I can’t take any job for which I would earn less than $100 per production hour and hit my profitability goals.”
As he estimates projects, Acton will look closely at jobs that are on the edges of his profit needs. “I won’t necessarily turn away a job that doesn’t hit the margins, but I’ll look at other ways to produce it, moving more of the work to subs where I do have capacity. This reduces the number of in-house man-hours and allows my guys to have more time to spend on higher-profit jobs.”
Creating this spreadsheet has helped Acton greatly increase his understanding of his production costs and how they relate to the company at large. “From my analysis, I know that my company works best when my in-house labor costs are close to 16.5% of the company’s revenue,” he says. “This is our sweet spot, giving us the profit we need and allowing us to maintain the right level of visibility to the client and deliver the best experience.”