Become a High Performance Business

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Maude Harmon
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1 Become a High Performance Business Tailored exclusively for SMACNA Members Excerpts taken from the book Managing Your Business for Profit 2017 Robert A. Langdon 5701 E. 17 th Avenue Parkway Denver, CO (303) , Fax (303) ralangdon1@gmail.com All rights reserved. No part of this material may be reproduced in any form without written permission by the author.

2 From Hello to Sold in Seven Steps 1) Identify & target your highest net profit customers Sell at a competitive price 3) Complement competition 4) Stress how your company & service is different 5) Ask questions directing the purchase decision toward your products & services 6) Never quote a price to an unsold buyer 7) Own your best customers 1

3 Three Routes to Increased Profitability 1) 3) Alternative A) Potential problem: Alternative B) Methods: 1) 2

4 Need Versus Want Purchase Decision Need: Want: When will you pay more? When will your customer pay more? Why? 3

5 How to sell emotion -- Not price Construct & Install Steel Security Doors Two most important factors: 1) Competitive Price Other Bids Their Bid 4

6 Are you the Best? Why? Who does your potential customer perceive as the best HVAC contractor? Why? Your potential uninformed customer assumes the biggest HVAC contractor has the best: 1) 3) 5

7 Marketing Strategy When can your strategy be defensive? Why? When should your strategy be defensive? Why? When should your strategy be offensive? How? What are your marketing advantages? 6

8 How Are You Different From Your Competitors? 1) 3) 4) 5) 7

9 Identifying and selling to the Upscale service-driven customer! B-T-B Sales Where does your profit come from? Odds of making a sale: All Customers How many of you pride yourself by treating all your customers the same? Do you have - - Think Customer Share not market share of Your Most Profitable Customers! 8

10 Payment Risk Payment Schedule Margins Character/Reputation in Industry Extra Service Requirements Volume Rating Totals Customer Rating Schedule Customer s Name 1) 3) 4) 5) Category Rating Legend 1 Excellent 2 Good 3 Average 4 Poor 5 Terrible Good Customer Profile? 9

11 Have a plan Customer Service Make list of to-do s: Ask for order: Follow-up 10

12 From Hello to Sold in Seven Steps 1) 3) 4) 5) 6) 7) 11

13 Three Routes to Increased Profitability Consolidated P & L Statement For the Year Ended 12/31/2016 Typical SMACNA Contractor Net Sales $ 12,500, % Less: Cost of Goods Sold Labor (5,625,000) (45.00) Materials (4,375,000) (35.00) Total Cost of Goods Sold (10,000,000) (80.00) Gross Margin 2,500, Less: Total Expenses (2,000,000) (16.00) Net Profit before Taxes $ 500, % Increase Net Increase Gross Margin Decrease Expenses Sales by 15% By.48% of Net Sales By.60% of Net Sales Net Sales $ % $ % $ 12,500, % Less: Cost of Goods Sold (11,500,000) (80.00) (10,000,000) (79.5 (10,000,000) (80.00) Gross Margin 2,875, ,575, ,500, Less: Total Expenses (2,300,000) (1) (16.00) (2,000,000) ( (15.91) (15.40) Net Profit before Taxes $ 4.00 % $ 4.57 % $ 4.60 % (1) For purposes of this example, we have assumed that when net sales increase due to increased sales activity all expenses are considered variable in nature. Therefore, total expenses will be 16.0% of the new net sales figure. ( For purposes of this example, we have assumed that the increase in the net sales figure was accomplished by simply increasing the sales price of the individual items sold. The quantity of items sold and the required sales effort have remained constant. Therefore, total expenses will not change from the $2,000,000 in the original consolidated P & L statement. 12

14 Impact from Increased Net Sales on Working Capital Requirements Sources and Uses of Working Capital Uses of Working Capital: Current With 15% Balance Net Sales Increase (1) Increase in: Accounts Receivable $ 2,500,000 $ Materials Inventory 59,932 ( Total Uses of Working Capital $ 2,559,932 Less: Current Balances (2,559,93 Total Increased Uses of Working Capital $ (A) Sources of Working Capital: Increase in: Profit $ 500,000 $ Accounts Payable Trade 71,918 ( Total Sources of Working Capital $ 571,918 Less: Current Balances $ (571,918) Total Increased Sources of Working Capital $ (B) Net Increase of Working Capital Required (A - B) $ (1) For purposes of this example, we have assumed all sales are made on credit, with collection days of 63 days; including retainage it s 73 days. ( For purposes of this example, we have assumed that materials inventory is turning every 5 days. The typical SMACNA contactor is paying its suppliers every 6 days. 13

15 Shrinkage Expense Continuing our discussion on the importance of controlling individual expenses, let's discuss "Shrinkage Expense" in a business. I define shrinkage expense as a reduction in economic value, which occurs in a business because of poor management, not just losses of inventory from theft. Let's complete a "Shrinkage Expense" exercise to determine the cost of shrinkage in your business. SALES NEEDED TO COVER "SHRINKAGE" EXPENSE At This To Cover $1.00 % Net Profit of Shrinkage 4% $ 8% $ 10% $ To Cover a Loss of: Typical SMACNA Contractor AT 4.0% NET PROFIT You Need Sales of: A $400 damaged item $ A $750 tool theft $ A $2,500 material shortage $ A $6,000 error in bidding a job $ A $7,500 bad debt $ $30,000 excess payroll $ 14

16 Expenses Variable and Fixed Expenses Variable expenses are expenses that increase or decrease with corresponding changes in sales volume. Fixed expenses are those expenses that stay practically the same over a relevant range of sales volume. Fixed expenses include such overhead items as rent, equipment depreciation, administrative salaries, business insurance and utilities. Commissions Travel & Entertainment Bad Debts Variable Expenses Rent Equipment Depreciation Administrative Salaries Business Insurance Utilities Fixed Expenses Fixed Expenses Time Frames Annual Some element of controllability 1) Long-term Very, very limited or no element of controllability 1) Sales 15

17 Salary 1) Focus Attention on Major Dollar Expense Categories To Improve Employee Productivity 3) Classify Your Expenses into Categories 1) Fixed Expenses Time Frames Annual some element of controllability Long-term very limited or no element of controllability 80/20 Rule 16

18 Calculating Your Company's Break-even Break-even analysis is a handy tool that gives you information regarding how much sales volume your business must generate to earn a profit of zero. This tool can be used to analyze your business as a whole or to analyze divisions within your organization. To conduct the analysis, expenses must be divided into two categories: fixed and variable. Remember, fixed expenses are those that stay practically the same over a relevant range of sales volume. Variable expenses are those that change in direct proportion to changes in sales volume. Suppose that fixed expenses for your business are $100,000, per month. Over the past several years your company's gross margin and variable expenses have averaged 20.0% and 6.4%, respectively. At what monthly sales level will your business break-even? BE = Fixed Expenses. Gross Margin % - Variable Expense % = $100, % - 6.4% = $100,000 % = $ per month Proof: Dollars Percentage Net Sales $ % Cost of Goods Sold ( 588,235 ) ( 80.0) Gross Margin 147, % Less: Variable Expenses ( 47,059 ) ( 6.4) Fixed Expenses ( 100,000 ) ( 13.6) Net Profit $ % 17

19 Calculating Your Company's Break-even Plus Profit as a Percent of Net Sales As business people, you are interested in making a profit not just breaking even. At what sales volume will your business make a 4.60% net profit, per month, before taxes. BE % Net Profit = Fixed Expenses. G M % - Variable Expense - Profit Goal (PG) as % of Sales = $100, % % % = $100, % % = $100, % = $ per month Proof: Dollars Percentage Net Sales $ % Cost of Goods Sold ( 888,889 ) ( 80.00) Gross Margin 222, % Less: Variable Expenses ( 71,111 ) ( 6.40) Fixed Expenses ( 100,000 ) ( 9.00) Net Profit $ 4.60 % 18

20 Calculating Your Company's Break-even Plus Profit of a Fixed Dollar Amount As business people, you are interested in making a profit not just breaking even. At what sales volume will your business make a $55,000 net profit, per month, before taxes. BE + $55,000 profit = Fixed Expenses + Profit Goal (PG) in Dollars G M % - Variable Expense % = $100,000 + $55, % % = $100,000 + $55, % = $155, % = $ per month Proof: Dollars Percentage Net Sales $ % Cost of Goods Sold ( 911,765 ) ( 80.00) Gross Margin 227, % Less: Variable Expenses ( 72,941 ) ( 6.40) Fixed Expenses ( 100,000 ) ( 8.77) Net Profit $ 4.83 % 19

21 Combining the Three Routes To Increased Profitability What happens to profit if simultaneously net sales increase by 15%, gross margin increases.48% of net sales and expenses are reduced by.60% of net sales? The figure below shows the effect of combining these three routes to increased profitability. Current % of Combined % of Operations Net Sales Increases Net Sales Net Sales $ 12,500, % % Less: Cost of Goods Sold (10,000,000) (80.00) (11,431,000) (79.5 (1) Gross Margin 2,500, ,944, Less: Total Expenses (2,000,000) (16.00) (2,213,750) (15.40) ( Net Profit before Taxes $ 500, % 5.08 % Less: Current Profit before Taxes (500,000) Net Increase in Profit From Combining These Three Routes to Increased Profitability (1) Increased purchasing power may enable the business to purchase its materials at a lower cost. Also, by differentiating the product or service being sold, gross margin should increase. ( As sales increase the business achieves some economies of scale. Therefore, as net sales increase, expenses are increasing, but at a decreasing rate. 20

22 Five Steps to Becoming a High Performance Business 1) Classify your expenses into categories: A) B) Time frame for fixed expenses: A) B) 3) Focus attention on reducing your major dollar expense categories: A) B) 1) 3) To Improve Employee Productivity 21

23 Five Steps to Becoming a High Performance Business 4) Differentiate your product and service to appeal emotionally to potential customers: A) B) 5) A) B) 22

Rent Revenue, Interest Revenue, Investment Income, Gains. Interest Expense, Losses

Rent Revenue, Interest Revenue, Investment Income, Gains. Interest Expense, Losses Chapter 5 Assigned Questions: 1, 4, 5, 7, 9, 11, 16, 17, 19, 20 1. The components of revenues and expenses differ as follows: Merchandising Revenue Sales Service Service Revenue, Fees Earned, Rent Revenue,