The Top 12 Business Mistakes - Part 3
by Kevin Lister In my last article, I shared with you the first eight of my Top Twelve Business Mistakes – sporadic marketing effort, inconsistent sales effort, poor customer service, incorrect estimating, low gross margin, inadequate job costing, poor workmanship and low productivity. Here are the final four – with a bonus fifth mistake. |
If you are encountering quality and/or productivity issues, take a close look at your operations because these three areas are interrelated. I suggest reviewing your project management system for holes and bottlenecks. Look into installing a project management software program if you are not already using one. With the software selection on the market today, you can easily find a package that fits your organization's needs. You might also want to ask a fellow contractor what he or she is using.
Secondly, take a close look at your company's tools and equipment to ensure you have enough in-house to meet your current and future production needs. If you don't, you may need to upgrade your existing equipment and/or purchase additional pieces.
10. High Cost of Goods Sold
Cost-of-goods-sold (COGS) are costs that are directly related to the completion of a job and include your labor, materials and sub-contractors. Generally speaking, your COGS should be no more than 70% of the selling price of a project. If your COGS is higher, you may be under-pricing your work (margins are too low), under-estimating your in-house labor hours and material and sub-contractor costs, or your people may be working very inefficiently.
If your COGS is high, I suggest tracking the costs related to labor hours, materials and subcontractors to determine which of these areas are the cause and then correct them as soon as possible. To monitor employee job labor hours, I advise implementing a daily time sheet system; to track job-related materials, I advise collecting all job-related materials receipts; and to trace subcontractor costs, I recommend requiring an invoice before payment.
11. Overhead Creep
Once you have addressed the COGS, you should look at your overhead burden. Overhead is common in business but tends to creep up from year-to-year if not monitored regularly. Typically, your overhead should be no more than 20% to 25% of your sales. If it is higher than this, I recommend looking at ways to reduce it.
Once you have trimmed the fat, I suggest that you create a budget for the upcoming year. By regularly monitoring expenses against your budget, you will prevent over-spending.
12. Declining Cash Flow
In business, cash flow is king. Yes, sales and profitability as very important, but no matter how much you sell, if you aren't collecting at a faster rate than you are spending, you will surely put yourself out of business. I have seen many good quality contractors close shop due to this issue. So, how do you prevent this?
Here are a few suggestions:
First, take a look at your client contract. Your payment schedule should be spaced out evenly with more money collected at the front-end of the contract than the back-end. If this isn't the case, then you will need to modify it.
Two, you should be collecting money at the start of and not the completion of a segment of a project. If you are not, I suggest changing this in your agreement as well. Also, you should bill as well as collect promptly, and collect in person whenever possible.
Three, when it comes to paying bills, pay them in thirty days, unless an early payment discount is offered. Also, if your payroll is disbursed weekly, consider paying it bi-weekly. This will save both time and money.
13. (Bonus) Inflated Owner's Salary
I have included this additional profit drainer to my top twelve list because I see it so many times. Owners often blame the company for not having enough money to support themselves when in fact the business actually is providing for them very well. The issue really is that the owner is taking too much out of the company.
The rule of thumb is that the owner should take no more than 10% of sales as a salary, or five to ten thousand dollars more than their highest paid field employee. The maximum salary should be $125,000 to $150,000 — the average trades CEO salary.
If your company is struggling with profitability and, as the owner, you are taking more than suggested you may want to look at ways to cut back on your living expenses.
I hope you enjoyed this three-part series, "The Top Twelve Business Mistakes." If anyone has any questions regarding these errors please feel free to contact me.
I write an article almost every month for Contractor Power. If any of you have a business-related question you would like me to answer in one of my upcoming articles, please feel free to contact me at info@paradigmstrategies.com. Also, if you would like to read any of
my previously written Contractor Power newsletter articles, you can view them at our Web site www.ParadigmStrategies.com.
About the Author
Kevin Lister, founder and president of Paradigm Strategies, the business advising firm to the trades, is a leader in the field of business performance improvement. He possesses nearly 20 years experience in business management and consulting, effectively operating his own ventures and assisting others with realizing business success.
With an entrepreneurial spirit and CEO's point of view, Kevin brings hands-on expertise to helping building contractors, sub-contractors, and suppliers. Kevin has deep knowledge and understanding of the trades, based on 14 years in the construction industry, a family history of owning trades businesses, and a genuine interest and enjoyment in helping blue collar enterprises.
Kevin possesses a Masters of Business Administration (MBA) from Olin Graduate School of Business at Babson College and a Bachelor of Science in marketing from Bentley College. He teaches management and marketing for the University of Phoenix Online.
Kevin is a member of several professional and business organizations, including the Institute of Management Consultants (IMC), the Builders Association of Greater Boston (BAGB), the Boston Chapter of the National Association of the Remodeling Industry (NARI) and the Associated Subcontractors of Massachusetts (ASM).
Kevin has been awarded the Certified Remodeler Associate (CRA) designation from NARI. He has also been named to the board of directors of the Eastern Massachusetts Chapter of NARI.
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