My work early each year typically is filled with past clients looking for an annual checkup and potential new clients hoping for insight into how to improve outcomes. What has alarmed me this year is how many remodelers have struggled to boost profits.
One client grew revenues by 50% in 2016, hitting $3 million with a 33% net margin. On reflection, that sparkling profit was achieved because the owner worked 60-hour weeks to keep the wheels on the bus. In 2017, the owner did the same volume hiring a production manager and a production coordinator. The result? Higher overhead … and a 7% net loss.
Another client, suffering from the impact of a divorce, sold 25% less in volume, slumping to $1.5 milllion in 2017. But because other overhead remained unchanged, this client ended with a 2% net loss rather than the budgeted 7% profit.
Now I’m asking myself, “How could one NOT boost profits in 2017?” The economy in most of the country was strong, leads were up, and backlog tended to be 8 to 12 months at minimum. Remodelers were selling at higher margins and clients were waiting in line to schedule their projects.
In this column I hope to shed light on what seems the most common missteps within this relatively large group of under-performing remodeling companies. These are, in no particular order:
- The owner taking his/her eye off the ball—aka “owner distraction”
- Abdicating instead of delegating
- Growing too fast, which led to one or more of the following:
- Hiring too many new field people
- Making too many systematic changes at once in estimating and accounting/job costing
- Changes in production management
- Investing in a showroom and/or marketing build up before production is effective
- Owner salaries and distributions increasing faster than net profit
Any one of these changes can be dangerous, any two often puts the company in ICU and any three at one time often prove fatal. (See my very favorite book on the topic of growth: Construction Contractor’s Surival Guide by Thomas Schleifer.) Solutions aren’t part of this column; in the future I’ll outline some of the best ways to resolve each. For now, determine which of these problems most impacted your company in 2017:
The past few years have seen average quarterly gains in remodeling activity of around 6%, Harvard’s Joint Center for Housing Studies reports.
While this looks and sounds encouraging, many remodelers have become distracted by either personal issues, such as divorce and/or depression, while others have chased shiny objects such as development and real estate flips.
These distractions result in reduced owner engagement with the very necessary steps needed to produce profitable growth: the development and testing of standard operating procedures in every area of the company, especially sales/estimating and production; the effective hiring and on-boarding of new personnel; and continuous review of job profitability and overhead control.
Abdicating Instead of Delegating
This is a dangerous and often undiagnosed malady in a remodeling company. Good people are hired and are given what the owner thinks is clear instruction as to their roles and responsibilities, even including key performance indicators. THEN the new hire is on their own to prove themselves. If all goes well, then all goes well. But without consistent periodic oversight and training during the important first few months, the employee might well think they are performing well but have no way of knowing. This is a sure sign of abdication instead of delegation.
Growing Too Fast
Manageable growth is the key to successful growth. Anything more than 20% annual growth is dangerous. Systems and people need updating and training to handle growth effectively. Even 20% is, to me, risky in that employee burnout can quickly lead to decreased employee morale, which in turn quickly leads to reduced client satisfaction. That leads straight to reduced gross profit!
Let’s look at some of the problems that can occur:
- Hiring too many new field people. The company I mentioned above once lost a $250,000 railroad car of lumber which had been signed as received the day before. It probably wasn’t a coincidence that the newly hired project manager didn’t show that morning. It was not recovered. It is difficult to train more than two new field people at a time; integrating them into the company culture typically takes 4 to 6 months for the best hire.
- Making too many systematic changes at once in estimating and accounting/job costing. A company I know well changed estimating systems three times in 18 months. During that time, it never had good job cost reporting because the estimating was in flux. At the same time, it changed cost codes three times in 18 months, which meant there was no consistency in the way it reviewed job costs as the job was in production. Gross margin fell, and the field employees weren’t particularly happy, as they didn’t know if they were doing well or not.
- Changes in production management. Rapidly growing companies often go through two or more production managers as they seek to find one who can deal with the chaos. I know of a company that within two years fired one production manager and saw two others quit. Were all three bad hires? Were they insufficiently trained? Were the systems in place for them to succeed? The problem really lay with the owner, not with the three hires.
Investing in a Showroom and/or Marketing
Another remodeler invested all his personal savings into a fabulous showroom in hopes that it would drive a mass of new clients to the company. It didn’t, and not only had he depleted his war chest, he also had to pay for the monthly upkeep of a larger space. The impact was the same when a remodeler invested 7% of annual volume in an expensive marketing campaign. Marketing typically takes more 18 months to gain traction and the company didn’t have available cash to fund 18 months’ investment.
Owner Salaries and Distributions
Enthusiasm and confidence from leads/sales/backlog and the general optimism which I associate with remodeling owners often leads to pulling more money out of the company than the annual net profit. Over the years, I have seen many remodeling company owners increase their personal standard of living even though the company net profit doesn’t support it. Other owners pull money out of the company in the form of distributions—which doesn’t hit net profit—without a clear understanding of how that impacts company cash flow and the development of a sufficient war chest of money for protection in bad times and safe investment in good times.
Remember: Slow and steady wins the race. Good luck!