I spoke the other day with two partners who run a remodeling and custom home building. Their company has grown, as many companies have since the Great Recession. With sales volume this year likely to be 50% more than the year before and volume next year possibly going up another 50%, these two gentlemen are feeling stress. There just is not enough time for them to do all that needs to be done.

A given is that they would like to be taking home more money while feeling more in control.

I think there are a number of contractors in the same position these days. How a company responds to the ebbs and flows of the marketplace can provide either comfort or frustration to the owners.

What can these contractors do?

Do What You Want to Be Doing

One of the challenges that exists now is “How can everything that needs to be done get done?” Adding staff is an answer.

In this case, the partners each take responsibility for their own clients. For a given client, one partner builds the relationship with the company, develops the scope of work, creates the estimate, helps with selections, gets the construction contract signed, and runs the project. Wow, just reading all that makes me tired!

The partners need to decide what they don’t want to do, as this is the first step toward sanity. Bringing on an estimator and/or a designer whose focus is helping with and managing the selection process would free up significant time for the partners to do more of what they like to do, as opposed to what they have to do.

Don’t Grow Volume

Just because the demand is there doesn’t mean a company needs to grow to be able to handle it. The company owner(s) needs to be very clear about what he/she wants to give the business regarding time and what the business is supposed to do for the owner regarding money.

Raising the company’s gross profit (overhead, including the owner’s salary, plus net profit) percentage can help the owner earn more money while the company does the same amount of business.

Say a company currently does $2 million in annual sales at a 20% gross profit. How could it earn more money without doing more business?

Gross profit of 20% of $2 million in gross sales is $400,000. Subtract $400,000 from the $2 million and the result is $1.6 million in cost of goods sold (aka COGS, otherwise known as direct costs). COGS includes only those costs which are invested in clients’ projects. Direct labor, subcontractors and materials are the main categories of COGS.

So let’s take those COGS for our hypothetical company and look at the possibilities.

COGS

Gross Profit %

Markup Multiple

Gross Sales

Gross Profit

Difference over 20% GP

$1.6M

20%

1.25

$2M

$400K

$1.6M

22%

1.28

$2.05M

$451K

$51K

Just a 2% increase in gross profit percentage creates $51,000 in additional gross profit.

So, what would a GP% of 25% produce?

COGS

Gross Profit %

Markup Multiple

Gross Sales

Gross Profit

Difference

$1.6M

25%

1.33

$2.13M

$533K

$133K

30%?

COGS

Gross Profit %

Markup Multiple

Gross Sales

Gross Profit

Difference

$1.6M

30%

1.43

$2.286M

$686K

$286K

Let’s look next at 33% gross profit, often mentioned as the minimum gross profit percentage needed to run a professional company.

COGS

Gross Profit %

Markup Multiple

Gross Sales

Gross Profit

Difference

$1.6M

33%

1.5

$2.388M

$788K

$388K

And now 40% gross profit, which is common in the kitchen and bath market.

COGS

Gross Profit %

Markup Multiple

Gross Sales

Gross Profit

Difference

$1.6M

40%

1.67

$2.667M

$1.067m

$667K

The differences in the gross profit percentage target produces much greater returns while still doing the same exact amount of work (COGS)!

Don’t Be an Order Taker--Sell

Let’s assume that the partners’ company is running well, with good employees who follow the systems the company has developed.

The single most effective way to make more money is to become better at sales.

I remember selling before I took sales training. It was a painful experience. I had no idea what I was doing. I was an order taker, a prisoner of what “the market” will allow. When one is a good salesperson it doesn’t matter as much what other companies are charging. You sell yourself and your company as the best solution to the potential client’s pains/problems. By doing so the potential client’s concern about cost drops.

How do I know? I learned how to do it, over time and with many mistakes along the way.

Easy for me to say, you might be thinking. All the above were lessons I had to learn. When I think back on the early years of our company, I can’t believe the head trash I had. It was only because I incrementally tried new ways of looking at things and getting things done that our company became more successful.

What do you have to lose?