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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 4 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 – – – – – – – 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 – – – – – – 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 • • • • • 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 • • • • • • • • • 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 – – – – 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? – – – – – – 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” – – – – Take an interest in the books Provide oversight and review Written ethics policy Random spot checking • Segregation of duties – – – – 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 – – – – 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 – – – – – – Cash balances Accounts Receivables, Accounts Payables Revenue per employee Margin analysis Gross margin and breakeven Cash flow projection • Track sales and marketing – – – – 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.