Bypassing Blunder: Avoid Common Pitfalls to Ensure Profits Grow With Sales
Are you or someone you know a “blundering contractor?” You know, someone whose sales have grown, yet their profits can’t seem to keep up. If you’re tired of working long, frustrating hours yet never having enough cash, avoiding a few common pitfalls will help you bypass the blunder and get on the fast track to success!
Failing to calculate something for a nonworking owner’s salary. Small contractors are working foremen, and much of their salary is earned as such. When they put down the tools, they have to add something to their bid to cover a nonworking owner’s salary.
If a contractor has five field employees, they will bill 10,000 hours (40 hours a week times 50 weeks a year). If they want to make $50,000 a year, it takes $5 an hour just to pay their salary.
Poor field leadership. Good foremen are hard to find. You cannot simply run a want ad and expect them to show up; it takes a while to build a field force. Out-selling field capacity almost ensures failure. What if you use subs? There is also no magic tree that subs grow on, plus the use of incompetent subs can create callbacks and reputation issues.
No job costing. Contractors who don’t particularly like paperwork tend to use the Las-Vegas-slotmachine method when calculating job costs. In other words, they remember the jobs that pay out big while ignoring all those that ate their dollars. When the owner is not on the job working, he or she must track costs and know if the job came in on time or not.
Bidding work as if the owner is doing it. Too many contractors don’t put enough time into their jobs and are poor estimators. We’ve tracked production and have found that installation costs can go up as much as 20 percent when the owner first steps off the job. Eventually, a company can build strong field leadership, but this takes time.
Failing to charge enough. Smaller companies can make it because the owner earns money in the field as a worker, but this only goes so far. Contractors must calculate their overhead and charge accordingly. As related to labor, not sales, many contractors’ overhead is larger than their actual install costs.
Weak administration. As contractors become overloaded, they tend to hire salespeople and production managers. What they need is better administrative support. A strong office manager can help keep you and the business organized. These employees are going to cost as much as a good craftsman or foreman; but if you’re disorganized, it’s better to hire someone to help you do that than trying to do it yourself. Remember, you might be able to teach a chicken to climb a tree, but it’s easier to start with a squirrel.
Failing to stop and keep score. There’s a tendency for contractors to think that if they work hard, everything will be okay, but that’s not always the case. It’s important to conduct a monthly financial meeting to review profit-and-loss statements as well as balance sheets, accounts receivable aging reports, job-closing ratios and backlog. Contracting is a fast-paced business where things can change quickly, so meetings such as these can help you see where you are and what needs correcting.
Poor sales practices. There’s always going to be someone who comes in cheaper than you, but it’s not your customer’s job to know the difference between you and your competition. If you cannot communicate with clients and sell them on value, you’ll be delegated to the life of a low bidder, and low bidders often go broke.
Denial. It’s amazing how many contractors keep doing the same things over and over, even when they’re losing money. Many don’t know what to do, so they simply avoid the truth by burying themselves in their work. You can keep telling yourself that next year is going to be better; but unless you change something, it will be exactly the same, and you’ll be one year older and deeper in debt.
Failing to understand cash flow. I hear contractors say, “Well, I just took that job for cash flow.” Really? That’s like saying, “I’m going to eat more fried food to get a heart attack.” Cash is like pulling a trailer behind your truck: if everything is hooked up correctly, you don’t have to keep looking behind you to make sure it’s still there. If you charge the right price, produce the job within budget and collect your pay, the money will be there.
Monroe Porter is president of PROOF Management Consultants, a company specializing in seminars and business consulting for contractors. He is also founder of PROSULT Networking Groups developed to help noncompeting contractors. He can be reached at 800-864-0284 or email@example.com. For more information, visit www.proofman.com.