Editor's Note: This is the fifth in our 2008 series of "Get Your Business to Work," written by our regular columnist George Hedley. In last month's article, George Hedley offered his first ten of twenty tips to boost your bottom line. Tips eleven through fifteen follow. To read the previous article, click here. To read the next article in the series, click here.
Ever been accused of being a sandbagger?
Golfers who pad their handicap are often called sandbaggers. They keep their handicap artificially high so they get a few extra strokes from their opponents when playing match play. The term "sandbagger" comes from the concept of filling your golf bag with some sand so it's heavier than normal, causing you to get tired and not play up to your potential. In order to keep their handicaps comfortably higher than they should be, sandbaggers do little things like missing short putts on purpose when they don't need to sink them to win a hole.
Business owners and managers have lots of things to do everyday to keep their ball rolling towards the target. They often get overloaded and don't take enough time to do everything perfectly as they know they should. After awhile, they get in the habit of doing things the easy or fastest way and take short cuts to get things done. This reduces their bottom-line net results. Think of the little things in your business you know you should do to play your best game everyday. When you don't follow sound business principles, added costs, small problems or costly mistakes add up and significantly weigh you down. This drags your bottom-line lower than it could be.
For example, when you keep poor employees on your payroll too long or continually use the same supplier without getting other bids, it saves you time but costs you money. When you continue working for bad customers rather than seek out new customers or don't take the time to focus on collecting your receivables fast, you're saving time and losing small amounts of money that add up significantly. When you do extra work without signed change orders, or only offer what is on the plans and specifications to get awarded jobs, you are saving time while not maximizing your bottom-line.
Whether you're too busy, stressed-out or overloaded, you have many options and choices available to do a better job or make more money. My last article gave you ten tools to boost your bottom-line. I hope you took the time to implement some of them. Here are more tools to help you get out of the rough, back on the fairway, make more putts and play up to your full potential. Make a point to try a few of them. This will help you get the unnecessary sand out of your bag and increase your bank account.
11. Clean Out the Dead Wood!
Who on your crew or staff causes you the most grief, doesn't do a good job or has a bad attitude? These poor performers are infiltrating everyone on your team and bringing them down. Poor performers should be cleaned out, fired and removed fast. Think of employees as trees in the forest. When they die, run out of life or stop growing, they become dead wood. Dead wood gets in the way, is a fire hazard and causes you to trip or fall as you move forward. When you let the dead wood remain, you tolerate bad performance. When you don't remove or clean out dead wood, other employees have to put up with them, work around them, cover for them and make excuses for them. Additionally, your good employees lose respect for a boss who won't do what's right in a timely manner and accepts less than the best from his people.
I know you're too busy to get rid of the "dead wood" employees and find new employees to do a better job. I know you can't find any good help. But by doing nothing and walking by poor performers, you're avoiding tough decisions and losing more money than you can imagine. One dead tree can reduce your crew efficiency by as much as 25 percent. Make a list of your employees and rate them on the skills you need them to have to be efficient and proficient in their duties. Also rate their attitude and aptitude. And rate them on their desire to take on more accountability, responsibility and leadership. Through this process, you'll discover your valuable employees, those who can improve and those who shouldn't work for you.
You shouldn't feel bad about realizing not everyone you hired was the right employee to work for you. You did your best hiring them. But some people eventually didn't fit the required job description or aspire to excellence in your company's environment. In other words, a few of your employees are working at the wrong place. It is not good for them nor you and they need to move on and find a place where they'll contribute in a positive way. Feel good about cleaning out the dead wood. It's good for you, your employees and those who'll be leaving your company. So get out your axe and cut out the dead wood. Then make it your priority to find positive people who'll make your company a better place.
12. Do More to Get More!
When you offer the minimum required by the project plans, specifications or contract, you can't expect to make more than the minimum allowed by the competition. I know you think you're better than your competition. Providing good quality work and service is expected and will get you on lots of bid lists with lots of competition. But in reality, your competition wouldn't be allowed on bid lists either unless customers believe they can do the job just as well as your company. When all else is equal, the only differentiating factor is a lower price. Now what? You have to offer more or provide something different than your competition to get more work at higher prices. People won't pay more for your services unless they get more than the minimum required.
Whywould you pay more for a box of sixteen penny nails that you could buy cheaper somewhere else? First, you don't really care who makes the nails. After all, they're just nails. You most likely wouldn't pay more unless there's something else offered to entice you to buy more or pay more for the same box of nails you can get at any hardware store.
What else can you do or offer to set yourself apart from your competition or be different? Can you add more services, provide more value, be faster, offer a better guarantee, provide higher quality, give longer warranties, be more convenient, provide better supervision, be cleaner, provide more technical expertise, offer engineering services, include more items of work, guarantee a completion date, provide a discount for faster pay or reduce risk?
I recently spoke at a conference of art dealers. The successful dealers were those who went the extra mile for their customers. These "best of class" dealers did more than sell paintings. They also provide free delivery, rearrange the furniture at their customers' homes to enhance the new artwork and then they professionally hang the paintings. They go the extra mile. And as a result, customers refer them to all their friends and family. What extras do you provide? Think more than you're doing now. What can you do to be different than your competition? The more you do, the more you'll make. The less you do, the less you'll make. Provide the minimum and get the minimum.
13. Markup Smaller Bigger!
I often get asked how much should we mark up our work to make a profit. Company owners are looking for that magic percentage that'll guarantee a profit on every job. But markup is tricky. It's a function of what you need to cover your fixed overhead costs plus a profit margin combined with what the market will bear. Smart business owners realize all jobs are not equal and markup should vary with every job.
First, determine how much total markup for overhead you need to cover all of your fixed expenses for the year. For example, if your total annual overhead is $500,000 and your total job costs are expected to be $5,000,000, you need an overhead markup of 10 percent to recover your overhead costs. Next determine how much profit you want to make for the risk you take. If you want to make $250,000 annual profit, your profit markup must average 5 percent using the above example. Now you have a minimum markup of 10 percent for overhead and a total profit markup goal of 5 percent.
In the above example, the key is to average 15 percent total markup over the year. To maximize your bottom-line, use a variable markup system. Smaller jobs take the same amount of time, energy, overhead and supervision as bigger jobs. Therefore, you need to charge more on smaller jobs for overhead and profit to cover the added cost of managing them plus a larger profit margin to get a return on your time and energy. I recommend you create a "Variable Mark-Up Chart" similar to the example below for your company to use when marking up jobs of variable sizes.
| Job Costs | OH & P Bid Markup | # Jobs | Total Markup |
| $0 to $50,000 | 25% | 20 | $125,000 |
| $50,000 to $100,000 | 20% | 15 | $168,000 |
| $100,001 to $250,000 | 17% | 10 | $297,500 |
| $250,001 to $500,000 | 15% | 5 | $281,250 |
| $500,001 to $1,000,000 | 12% | 2 | $180,000 |
| $1,000,001 and larger | 10% | 1 | $100,000 |
| Total OH & P Bid Markup | 15% average | 58 | $1,152,500 |
| Total OH & P Goal | $750,00 |
*Do not use these markup percentages - they are just examples!
By having an annual goal of 15 percent markup to realize your goal of $750,000 total Overhead and Profit (OH & P), you can make decisions about the number of jobs and at what rate you need to mark them up to meet your goals. Note the bid goals are higher than what you really need. This allows for bad jobs or competitive factors that are out of your control.
14. Fire the Deadbeat Customers!
Do you have a customer you wish you never did business with? Do you have customers who don't pay their bills in a timely manner or chisel you down and try to get you to take less than you're owed? Do you have customers who are very difficult to deal with or don't provide proper supervision on their projects? Do you have customers you wish you never heard of? What are you doing about firing these "dead beat" customers who take all your time, drain your energy, ruin your life and suck money out of your business?
Make a list of all of your present and past customers and rank them by:
- Total annual revenue
- Total profit
- Average job size
- Return on Energy (ROE) factor
- Pain in the Assets (PIA) factor
The ROE and PIA factor deal with those customers who cost you the most time, energy and money. Next decide if the lowest ranked or deadbeat customers are worth the ROE and PIA factor. Every year, take a hard look at the customers you spend time working for. I recommend you fire at least 10 percent to 15 percent of your customers annually. This forces you to go out and find new customers who'll respect and treat you as professionals and allow you to make a good return.
15. Collect Your Cash!
You work too hard and your business is far too risky to not get paid in a timely manner per your contract terms. Many business owners don't like to call their customers and ask for money and when they'll get paid. They delegate it to their bookkeeper and let her do what she can. And to make it worse, they don't meet with her on a regular basis to review the outstanding receivables. Besides, you're too busy working to take time to care about collecting money. And you don't want to harass lousy customers who demand perfect quality and great service and then don't pay their bills.
You're in business to make money. The only way you can make any money is if you collect it. When you ignore your accounts receivables and let your customers take advantage of you, it's an indication of weak business principles, character and confidence. What are you afraid of? Why aren't you a squeaky wheel demanding to get paid when your money is due? Are you afraid of upsetting or losing bad customers?
Customers who don't pay promptly cost you lots of money. You're stressed about making payroll or covering expenses. You make bad decisions and discount your invoices to get paid early. Not getting paid promptly also creates a cash-flow problem. This cash crunch keeps you from hiring and training better employees, buying the latest tools and equipment, marketing to potential profitable customers and giving incentives to your crew to increase productivity. It also takes away the opportunity to invest your cash and receive interest on you checking account balance. Without realizing it, your customers are stealing from you.
The effects of slow pay from customers hurts your bottom-line in more ways that you can imagine. To boost your bottom-line, you must make it a priority to focus on prompt pay and collect your cash. Read the contract payment terms you sign and force your customers to follow them. Setup a receivables tracking system and meet with your accounting manager weekly to review it. Make those collection calls to the decision maker and inform them of the contract terms. And don't be afraid to enforce the contract by giving proper notice, stopping work, placing a lien on projects or filing lawsuits when justified. As a general contractor for over thirty years, I have observed that companies tend to pay quicker when asked for their money firmly and regularly. And those who sit and wait for the check to arrive in the mail get paid last.
Making money is not easy. Look for every advantage you have to boost your net profit margin. Take the time to implement as many of these tools as you can. In the next article, I will explore 5 more ways to boost your bottom-line. Send me an e-mail of the business tools you use to increase your net numbers. See you at the bank!
Construction Business Owner, May 2008
