Download 20 Ways to Increase Profits

20 Ways to Increase Profits
20 Ways to Increase Profits
Leslie C. Shiner
Owner, Principal
The ShinerGroup
A copy of this presentation is
available upon request to
[email protected]
Leslie Shiner
• Owner of The ShinerGroup
• Financial & management consultant for over 25 years
– MBA in Accounting and Finance from U.C. Berkeley
– Advanced QuickBooks ProAdvisor
– Sage Certified Consultant
• Contributing Columnist
– Remodeling Magazine
• CPA Practice Advisor 2016 Top Thought Leader
• Author
– A Simple Guide to Turning a Profit as a Contractor
– (www.MoneyMazeBooks.com)
© 2016 The ShinerGroup. All rights reserved.
1
20 Ways to Increase Profits
Learning Objectives
• Increase profits by focusing on
the five areas of significance
• Create a plan for increased
efficiency
• Spot quick fix solutions for
improved profitability
How Do You See Your Business?
Do you see a series of ongoing, overlapping jobs?
Smith kitchen and bath
Jones whole house remodel
Simpson gazebo
Jackson 2nd story additional
Anderson job
© 2016 The ShinerGroup. All rights reserved.
2
20 Ways to Increase Profits
Understand The Profit Cycle
Estimating and Sales
Analysis
PROFIT
Production
Accounting
Five Areas of Significance
 Estimating and sales
• Project management
• Financial management
• Analysis
• Strategic management for profit
© 2016 The ShinerGroup. All rights reserved.
3
20 Ways to Increase Profits
Estimating and Sales
1. Know how to create a proposal as a
repeatable process
– Utilize software to create proposals
• Look to similarities in all jobs for template
– Distinguish between the “Budget” and the “Proposal”
• Create a proposal for the client
• Create a budget that will be the basis of all job cost reports
– Measure productivity
– Understand your overhead
– Know the difference between markup and margin
What is Negotiable?
Profit
Negotiable
Overhead
Direct Job
Costs
Labor
Materials
Subcontracts
Equipment
© 2016 The ShinerGroup. All rights reserved.
Non-negotiable
without change
of scope
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20 Ways to Increase Profits
Budget vs. Proposal
Profit
Overhead
Budget
Your costs
Used to compare
estimated costs to
actual costs
Direct Job
Costs
Labor
Materials
Subcontracts
Equipment
Proposal
Your revenue,
your client’s
costs
Estimating and Sales
2. Create a Process Map
–
–
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–
–
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Involve all company staff
Deal with all aspects of projects
Create company standards
Planning, documentation & accountability
Near real time reporting
Change order / revision process
File & information management
© 2016 The ShinerGroup. All rights reserved.
5
20 Ways to Increase Profits
Lead Tracking
Client Meeting
Budgeting
Proposal
Engineering
Project Management
Equipment Order & Tracking
Demolition
Framing
Finishes
Trim
Punch List
Change Orders
Review
Warranty
X
Of fi c
e
Prod
ucti o
gn
D esi
Sale
s
t ing
Mark
e
Process - Sample
n
From Simple to Complex
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Estimating and Sales
3. Deliver an excellent on line presence
–
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Have an accurate, up-to-date, inviting website
Engage in social media
Blog regularly
Manage your online reputation
Explore online listing
Track online activity
© 2016 The ShinerGroup. All rights reserved.
6
20 Ways to Increase Profits
Effective Website Marketing
•
•
•
•
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Unique page content
Avoid duplicated content
Link building (inbound & outbound)
Clean & consistent pages
Boost SEO (Search Engine Optimization)
Must Haves on Your Website for Credibility
•
•
•
•
•
•
•
•
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Business process
Professional project, pictures, galleries
Contact info & web-lead form
Mission/vision statement
Company history, employee history
Community involvement
Awards & certifications
Publicity
Testimonials
© 2016 The ShinerGroup. All rights reserved.
7
20 Ways to Increase Profits
Effective Social Media
• Add professional after-pictures of recently
finished projects
• Post recent blog & news: news that affects
potential and existing customers
• Let Facebook fans, Twitter followers, or
LinkedIn connections know when you win
awards or get recognized
• Create Buzz!
Estimating and Sales
4. Ask for referrals
– Then ask for referrals again
#1 Source of new work comes from
referrals and repeat business
© 2016 The ShinerGroup. All rights reserved.
8
20 Ways to Increase Profits
Five Areas of Significance
• Estimating and sales
 Project management
• Financial management
• Analysis
• Strategic management for profit
Production
5. Create and utilize schedules
– Create schedule to improve sales
• Use a schedule as part of your marketing plan
– Create schedule to improve procurement
• Prior to the start of the job and during the job
– Create schedule to improve production
• During the job to improve productivity with subs and
employees
– Just one way to improve profit
© 2016 The ShinerGroup. All rights reserved.
9
20 Ways to Increase Profits
Create a Gantt Chart
Create a Schedule and Update it!
Crew A
Crew B
© 2016 The ShinerGroup. All rights reserved.
Crew C
10
20 Ways to Increase Profits
Production
6. Manage change orders
– Are you consistently going over budget?
• Could it be that there is more work done in the
field than in the original scope of work
If you are already doing the work…
Why not get paid?
• Start from the beginning - during the sales
process
– Clearly state the scope of work in the contract
– Define the process for changes
– Prepare your client for change orders
Create a Process for All Changes
• Create field documentation
– Change order work authorization form
– Filled out on the job
• Manually or electronically
– Three part form for 1) client 2) field 3) office
– Not necessary to include pricing
– Get signature from client
• Make the process easy for your field crews
Too much paperwork may mean more free work
© 2016 The ShinerGroup. All rights reserved.
11
20 Ways to Increase Profits
Stop Losing Money on Change Orders
• Review past jobs
– Did change orders cause slippage in estimated gross
margin?
• Create zero dollar change orders
– Turn change orders into “Profit Center”, not
administrative nightmare
• Consider ‘Processing Fee’ on all change work
Production
7. Manage employees
– Use daily timecards
– Track employee utilization
– Are your most expensive employees doing the most
difficult tasks?
• Who goes on the material runs?
– Do you need to hire more field personnel or help your
current crews be more efficient?
© 2016 The ShinerGroup. All rights reserved.
12
20 Ways to Increase Profits
Consider Bonuses
• Bonuses provide flexibility
– Wage increases are typically permanent
• Bonuses based on net profit are difficult to predict
– “What can I do differently today to increase my bonus?”
• Bonuses based on gross profit can improve
production
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–
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Provide estimated hours on job
Provide reports to show estimated costs to actual costs
Provide incentives to keep jobs on track
Can base incentives on time instead of dollars
Production
8. Manage subcontractor relationships
– View subcontractors as source of additional revenue;
paying their overhead and profit can make you more
profitable
– Set expectations with subs
– Respect their time
– Communicate schedule in advance
– Pay promptly
© 2016 The ShinerGroup. All rights reserved.
13
20 Ways to Increase Profits
Production
9. Create system for efficient material
procurement
– Have the right material on the right job at the right
time
– What is the cost of one more box of nails?
– Avoid jumping at the “deal” for bulk purchases
• Utilize a Purchase Order system
– Not a PurchasED Order System
– No purchases without prior authorization
– Control employee credit card spending with strict
limits
Five Areas of Significance
• Estimating and sales
• Project management
 Financial management
• Analysis
• Strategic management for profit
© 2016 The ShinerGroup. All rights reserved.
14
20 Ways to Increase Profits
Financial Management
10. Require accurate job costing
– Accounting without job costing is like driving without
a map
• If you aren’t job costing, you can’t measure
margins
– Create the end result (job cost reports) to begin the
process of job costing
– Decide what you really need to track?
• Labor has the most risk
• Are you tracking labor dollars and labor hours?
Financial Management
11. BEBO
– Bill early, bill often
– Create process for accounts receivable collections
– Create process to track and invoice for change
orders ASAP
– Accounts receivable is just as important as accounts
payable
Bill Early,
Bill Often
© 2016 The ShinerGroup. All rights reserved.
15
20 Ways to Increase Profits
Financial Management
12. Track cash flow
– Create cash flow projection
– Cash flow is more than just income and expenses
– “Money in” isn’t just from sales and collecting
receivables:
• Borrowing funds, selling assets, acquiring investors, earning
investment income
– “Money out” isn’t just from paying expenses
• Repaying loans, purchasing assets, paying taxes, making
profit distributions
Net Income vs. Cash Flow
Income Statement
Sales – COGS – Operating Expenses = Net Income
Cash Flows
Beginning Cash Balance – Ending Cash = Flows
Net Income does not equal Cash Flow
© 2016 The ShinerGroup. All rights reserved.
16
20 Ways to Increase Profits
Cash Flow Projection Steps
1. Start with last year P&L Statement
– Review data for patterns and trends
– Estimate revenues and expenses for upcoming year,
incorporating goals and backlog
2. Look at other cash flow, not in P&L
– Purchases such as equipment/vehicles or loan payments
3. Budget for the unusual, infrequent payments
– Liability insurance and worker’s comp deposits, taxes, etc.
4. Know the pattern of cash flows
– Schedule: yearly, monthly, weekly
5. Tailor to your business
Different Thinking
Classify costs into three types
1 – Variable
• Fluctuates with the job, specifically materials
and subcontracts
2 – Recurring
• Reclassify payroll as a recurring cost
• Other overhead costs
3 – Infrequent
• Those costs that are not on a monthly schedule
© 2016 The ShinerGroup. All rights reserved.
17
20 Ways to Increase Profits
Create Company Cash Forecast
• Starting Cash Balance
• Add:
– Job income, listed by job
• Subtract:
– Variable – materials and subcontractors
– Recurring – labor and overhead
– Infrequent - unusual or extra costs
• Equals
– Cash available, (or cash needed!)
• Then add or subtract credit line as appropriate
Simple Cash Flow Sample
January
February
March
April
Beginning Balance
Variable
Cash In
Job A
Job B
Job C
Cash Out
Materials
Subcontractors
Recurring
Cash Out
Labor
Rent
Utilities
Infrequent
Cash Out
Work Comp Deposit
Tax payments
Net Cash Flow
Ending Balance
© 2016 The ShinerGroup. All rights reserved.
18
20 Ways to Increase Profits
Know Your Burn Rate
• How much money does it cost to stay in
business each month?
– Look at total overhead
– Divide by 12
• That’s the cash out the door every month
– Or do it weekly
• Can your jobs cover your burn rate?
Financial Management
13. Take all discounts
– Free income
– Improves your bottom line
– Negotiable – call your vendors
• Rates can vary
– Track discounts as separate line item
• Increase income
• Do not decrease expense
• Do not pass on to the client
If you take 2% discount, what is the
equivalent annual interest rate?
© 2016 The ShinerGroup. All rights reserved.
19
20 Ways to Increase Profits
Answer
1. Payment terms offered
2%10/net 30
2. # days additional if payment
not taken
20 days
3. Divide 365 by # of days
18.25
4. Multiply step 3 by discount
36.5%
5. Take discount if your cost of borrowing is less
than step 4
Financial Management
14. Create system for Internal Controls
• Study by Association of Certified Fraud
Examiners
– Employee theft costs about $600 billion dollars
annually
• What is stolen?
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Cash
Tools
Inventory
Services
Supplies
Insurance benefits
It’s not a question of “if”
but “when and how much?”
© 2016 The ShinerGroup. All rights reserved.
20
20 Ways to Increase Profits
The Fraud Triangle
Opportunity
Motivation
Rationalization
Fraud Triangle
The Fraud Triangle was developed by
noted criminologist Donald R. Cressey
Good Internal Controls
• “Tone at the Top”
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Take an interest in the books
Provide oversight and review
Written ethics policy
Random spot checking
• Segregation of duties
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Layers of responsibility
Layers of authority
Limited signatory authority
Extra set of eyes
Creating controls
does not mean lack
of faith but
good business
practices!
• Review financial statement accuracy for fraud
prevention
© 2016 The ShinerGroup. All rights reserved.
21
20 Ways to Increase Profits
Five Areas of Significance
• Estimating and sales
• Project management
• Financial management
 Analysis
• Strategic management for profit
Analysis
15.Determine the metrics you need to manage
your company and manage each job
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–
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Track revenue per employee
Track employee utilization
Track bid/close ratio for leads
Track gross margin by job
• Gross margin for material
• Gross margin for labor
– Track gross margin by type of client
• Commercial, residential, public works
© 2016 The ShinerGroup. All rights reserved.
22
20 Ways to Increase Profits
Analysis
16. Create an Executive Dashboard
– Create a one to two page document - No more!
• Look at the forest, then the trees
– Overview for management purposes
– Include everything you need to know
– Include:
• Dollars
• Percentages and ratios
• Forecasts
Customize to Your Needs
• Track financials
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Cash balances
Accounts Receivables, Accounts Payables
Revenue per employee
Margin analysis
Gross margin and breakeven
Cash flow projection
• Track sales and marketing
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–
–
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Number of leads
Number of proposals
Backlog
Jobs to complete
© 2016 The ShinerGroup. All rights reserved.
23
20 Ways to Increase Profits
Customize to Your Needs
• Track operations
– Employee efficiency
– Warranty
– Schedules
• Track human resources
– Employee retention
– Safety records
• What else do you need to track?
Sample Balance Sheet Dashboard
Measure
sustainability
Snapshot
and ratios
© 2016 The ShinerGroup. All rights reserved.
24
20 Ways to Increase Profits
Sample Income Statement Dashboard
Measure
profitability
Snapshot
and ratios
Analysis
17.Analyze jobs during and after
• Compare actual costs to budgeted costs
– Review the varianced
– Labor has the most risk. Analyze:
• Hours variance
• Dollars variance
• Know how to actually close a job
– When do you stop coding costs to a job?
– Determine how you account for warranty costs
© 2016 The ShinerGroup. All rights reserved.
25
20 Ways to Increase Profits
Five Areas of Significance
• Estimating and sales
• Project management
• Financial management
• Analysis
 Strategic management for profit
Strategic Management for Profit
18.Utilize metrics
– Create objective (not subjective) measurements
• Create KPI – Key Performance Indicators
– Revenue per employee
– Gross margin projected vs. achieved
– Labor utilization
• Create targets for individuals
• Determine who is responsible for what
measurement
© 2016 The ShinerGroup. All rights reserved.
26
20 Ways to Increase Profits
Strategic Management for Profit
19. Become a better manager
– Distinguish between managing and doing
– Give up the “I’m the only one who can do it right”
attitude
– Explore the characteristics of effective leaders
– Become better at conflict resolution
Characteristics of Effective Leaders
1.
2.
3.
4.
5.
6.
7.
Leads by example
Manages time efficiently
Resolves conflict
Acts consistently and treats others consistently
Motivates others
Promotes teamwork
Stays positive
© 2016 The ShinerGroup. All rights reserved.
27
20 Ways to Increase Profits
Strategic Management for Profit
20.Use the financial information to analyze the
results of past decisions to make better
decisions in the future
– Measure margins
– Find your ‘sweet spot’!
– Create an operating budget to make spending
decisions
– Create a breakeven analysis
– Delegate, don’t abdicate financial responsibility
– Make informed decisions!
Five Areas of Significance
 Estimating and sales
 Production
 Accounting / financial management
 Analysis
 Strategic management for profit
© 2016 The ShinerGroup. All rights reserved.
28
20 Ways to Increase Profits
Questions and Thank You
Leslie C. Shiner, MBA
[email protected]
(415) 383-6255
www.ShinerGroup.com
www.facebook.com/TheShinerGroup
Twitter: @TheShinerGroup
A copy of this presentation is
available upon request to
[email protected]
© 2016 The ShinerGroup. All rights reserved.
29
Company Name
Financial Dashboard
Week of:
March 31, 2017
Balance Sheet Items (measure of liquidity)
Checking Account
Consolidated
235,200
Line of Credit
Current Balance
Available Credit
40,000
105,000
Current
1 - 30
31 - 60
61+
Balance of A/R
Receivables
265,400
126,900
45,100
18,400
455,800
Current
1 - 30
31 - 60
61+
Balance of A/P
Payables
244,700
23,800
13,000
43,900
325,400
Inventory
Prepaid & Other
Other
68,200
21,900
0
Plus PR Taxes & Other
Other
Cust Deposits/Overbillings
12,500
0.0
152,500
Total Current Liabilities
530,400
Total Current Assets
781,100
Current Ratio
(Should be > 1.25)
(Higher is better)
Current Assets
Current Liabilities
Debt to Equity
(Should be < 1)
(Lower is better)
Total Liabilities (all)
Total Equity
© 2016 The ShinerGroup. All rights reserved.
1.47
785,000
910,000
0.86
Company Name
Financial Dashboard
Profit and Loss Items
Week of:
(measure of profitability)
March 31, 2017
Last Completed Month
Completed Months 3
Revenue
COGS
Gross Profit ($)
Overhead
Net Profit
Average # Employees
Average # Field Employees
Year-To-Date
3 Months
459,100
305,700
153,400
143,000
10,400
28
24
1,304,000
848,452
455,548
350,000
105,548
29
25
Gross Margin - %
Gross Profit
Revenue
Breakeven
Overhead Costs
Gross Margin
427,975
1,001,870
Revenue per Emp
(annualized)
Total Revenue
# Employees
196,757
179,862
Revenue per Field Emp
(annualized)
Total Revenue
# Field Employees
229,550
208,640
Closing Ratio
(current year only)
Total # Job Closed
Total # Jobs Quoted
Backlog to be completed in next 3 months
Backlog to be completed in next 6 months
Backlog to be completed in next 12 months
Accounts Receivable Turnover:
(Higher is better)
Revenue
A/R Balance
33%
35%
31
70
44%
768,000
1,410,000
2,570,000
12.09
Days in Receivables
(Lower is better)
365
A/R Turnover
30
Inventory Turnover
(Higher is better)
(annualized)
COGS
Inventory
53.79
© 2016 The ShinerGroup. All rights reserved.