Markup & Profit

Tuesday, December 11, 2007

End of Year Planning, Part 2

Last week's newsletter ended with "Have you tried direct mail advertising? What have you tried that generated the type of leads you want? That is where to focus your money. Check the results monthly to see the results and adjust your advertising as needed."

Let me add a comment. If you are not getting the type of leads you want, or if you are getting leads from customers whose only focus is price, you are advertising in the wrong place. This also frequently happens when you are working by referral only. You end up with leads that are a waste of your time.

What else do we need to plan for 2008? Below is a list of the things that need to be resolved. Using the stats you compiled from 2007, it should be a relatively easy task.

But first, there are two thoughts you need to keep as you go through this exercise.
  • 1. Always keep the attitude of: "Where can we save", not "Where can we cut".

The attitude of "Where can we save" means thoroughly analyzing the subject at hand. What is it, where and how is it used? Can we use it differently or in conjunction with other things? What can we do to reduce the cost of owning or operating the item? Can we extend its life, can we reduce the maintenance required for successful operation? Saving costs requires taking a long-term view and making a smart, well-thought out decision.

The attitude of "Where can we cut?" is an emotional reaction. It means eliminating something completely so you can save money today, but it doesn't take the long term view. Normally this happens after little thought to anything other than eliminating that expense.

The two are as different as daylight and dark and the prudent contractor will always focus on saving rather than cutting.

  • 2. I read a quote recently from one of my favorite guys, Brian Tracy. He said, "Decisiveness is a characteristic of high-performing men and women. Almost any decision is better than no decision at all."

Decide to give this 2008 planning session your best effort. Spend quality time each day working on your plans and goals for 2008. Don't give it lip service, reading through this newsletter and telling yourself you will get to it right after Christmas.

You will get out of this exercise exactly what you put into it. Give it your best effort and one year from now you will be amazed at the results.

2007 TAXES

This needs to be a priority. Make it a goal to have all your tax materials together and ready to go to your CPA by the end of January, 2008. Call your CPA and schedule an appointment for the last week of January to be sure you follow through. Taxes are a distraction.


  • What is your budget for office equipment for 2008?
  • What new equipment do we need?
  • What equipment needs to be repaired or replaced?
  • Is the traffic flow in your office good or do you need to rework or remodel your office next year?
  • Do you have staff members that might function better in a different place in the office?
  • Is your showroom a collection spot for almost anything that comes in the front door, or is it kept neat, clean and ready to help your customers?
  • Are parking spaces in front of the office reserved for visitors only? Staff, subs and suppliers should park away from the front entry so your customers have easy access to your front door.


  • What is your budget for office staff for 2008?
  • Are classes or seminars available for your office staff to help them do a better job?
  • Do you have a plan in place to take key people to at least one convention this year?
  • Do you have a plan in place to purchase (and read) at least one new book each month?
  • Is there someone you can bring in, a coach, a consultant, a trainer that can provide training for you or your staff?
  • Do you have problems or issues that warrant that?
  • Have you scheduled your year-end review for each member of your staff, which should include reading and signing your employee manual?

This review should include an analysis of their performance in 2007. Ask yourself this question for each employee:

  • Do I need this person in this job?
  • Are they doing the job they have been hired to do?
  • Should I combine two or more jobs, or should I hire another to share their workload?

Here are some additional questions about your employees:

  • Are they willing to cross train for other jobs?
  • Can they help doing the cross training of other employees?
  • Should this person be asked to take a more responsible position?
  • Could I find a replacement that would do a better job?


  • What is your budget for paperwork for 2008?
  • Does your contract need updating? (Very few don't)
  • Do you have pre-printed change work order forms?
  • Do you have pre-printed Right of Rescission forms?
  • Do you keep about one month of paperwork in reserve?
  • Is your company Employee Manual up to date, a copy on file for every employee? Has everyone signed the manual?
  • Is your sub-contractor manual up to date?
  • Are you using a sub-contractor agreement manual with a separate form for each job? Are all your subs required to sign the agreement before they are allowed onto any job site?
  • Do you have a standard checklist in place to check that your subs license, bond and insurance are always up to date?
  • Does your company provide or help with obtaining financing for your customers? Do you have a checklist to cover every step that needs to be taken to obtain the financing needed for your work?


  • What is your budget for tools and equipment for 2008?
  • Do you have a list of each tool or equipment owned by the company complete with serial numbers, make, model and instruction books?
  • What needs to be repaired?
  • What needs to be replaced?
  • Did you spend more in 2007 to rent equipment that you would have spent purchasing the same equipment?
  • What will be our maintenance cost for the year for T & E?
  • Do you have equipment in storage that should be sold?


  • Are all of your vehicle licenses up to date?
  • Do you have all the VIN #s and license plate numbers written down and easily accessible?
  • Are all your trailers legal, including lights, license and weight postings?
  • Did you pay more in 2007 for moving equipment to different job sites than you would have spent if you had a trailer for that equipment?
  • What vehicle(s) needs to be repaired?
  • What needs to be replaced?
  • Do you have a written maintenance schedule in place for each vehicle?


Plain and simple, you should not have any inventory. If you have leftovers from a job, take them back to the supplier and pay the restock fee. It is far cheaper than maintaining a storage facility.


What educational programs do you need for yourself and your staff? After your review of 2007, you should notice if you or your staff need outside instruction on how to do things more efficiently and/or more profitably.

As stated above under "Staff", plan on adding at least one new book to the company library each month. Place someone in charge of the library, checking books in and out so they don't wander away permanently.

Attend at least one convention in 2008. You should be able to take your key people with you. This is not a fun and games trip, this is an educational trip. You and your staff should take advantage of every class available.


Are you involved with an association? If you are, it is time to ask some tough questions. It is all too easy to get caught up in association work and involvement at the expense of both your business and your family.

If you are on the Board of Directors, is it taking time away from your business that is costing you money? You need to look long and hard at your level of involvement and weigh the value of your time and money invested compared to the return you are getting. Yes, you need to give something back to the industry. You also need to take care of your own business. All too often company owners work through the chairs of their association while their business goes from bad to worse, then bankrupt.

Associations are very good for our business in general and for your particular business. No question. They provide political clout to keep bureaucrats and elected people focused on what is important. They provide marketing that can be a boost for your business. And the networking available, the ability to spend time with others who fight the same battles you fight, is invaluable. But make darned sure that your involvement stays balanced with the discretionary time you have available from your business and family.


Just as you would schedule your vehicles and equipment for regular maintenance, scheduling a financial check up for your company is a sound idea.

Whether managing cash flow, determining whether you can afford employee salary increases or projecting sales figures for the next quarter, a frequent review of your financial position is beneficial to keep your company running smoothly and avoiding problems that could derail your progress.

Please keep in mind that almost all financial problems of any construction company show warning signs well in advance. I have written about the Eight Warning Signs of Financial Problems in construction related companies in these newsletters, and discuss it in the Markup & Profit Video. Ignore them at your own peril.

If you are new in business or have been in business less than two years, check your financial position every other month at least. After that you should have the experience to check things about every six months and make adjustments as needed.

The key issue here, gang, is to put the financial checkup in writing, with check lists and a definite schedule, then make darned sure you do it. No excuses, no stories, no procrastination. "Get-R-Done".


As I talked about last week, I have been through eight cycles in this business over the last forty plus years. Things repeat themselves every five to seven years in this business so what you are seeing today in our economy is normal. The economic adjustment we are going through has nothing to do with the present administration, what the media thinks (or doesn't), what any political party or candidate likes or doesn't like, believe or doesn't believe. This is America at work.

When you get married, it is for better or worse, richer or poorer. When you go into business, it is peaks and valleys, the good with the bad. If you can't handle this market adjustment that will probably hang around until after our next presidential election, now is a good time to call it quits and find something else to do. We wish you well.

For those that see this downturn as an opportunity to polish both your sales skills and the way you run your business, you will find many rewards in the near future.

Tuesday, December 04, 2007

Planning 2008 - Part 1

This week and next we are going to review 2007 and plan 2008. I am borrowing some thoughts from Tony Robbins, one of the better known motivational speakers and educators. I also got help from my friend Sonny Lykos, who has been in business many years and knows this exercise.

First thing, describe your business. What is it exactly you do? What is it exactly you want to do? Are the two the same? Write it down so you can see and touch it, make it yours. Gang, this is no place to get lazy. You'll want a reference point throughout this exercise.

Next, review 2007. We want to look at all the issues, not just the good stuff that has happened. This is called an honest evaluation.

Let's start with the following.

  • How much business will be sold, built and collected by December 31?
  • What will be your net profit?
  • What will be your Gross Profit?
  • What will be your Gross Margin?
  • What will be the total owner's compensation?
  • How many leads did you get in?
  • How many leads turned into actual appointments with customers?
  • How many jobs did you sell?
  • What was your sales to leads ratio?
  • What was the average sale price?
  • What markup (or gross margin) did you use?
  • Did you use just one markup or did you fall into the trap of different markups on different jobs?
  • List all of your lead sources.
  • List the leads and sales in each category.
  • Calculate the cost of each lead in each category.
  • Who are your employees?
    What are their skills?
  • What is their record of on time performance both showing up for work and getting jobs done?
  • Do we have deadwood on staff?
  • List the good and any problems you had with each employee.
  • If you had a problem, did you come up with a solution and implement it?
  • Do you have a program in place for cross training employees?
  • Are any of your employees willing to be cross trained?
  • Are any of your employees willing to cross train others?
  • Who can you train to cover for or replace you?
  • What subs do you have an ongoing relationship with?
  • What subs are on your "don't use again" list, and what subs are on your "call first" list?
  • What is their record of on time performance both showing up for work and getting jobs done?
  • What are the strengths and weaknesses of each?
  • How was your safety record?
  • Did you hold regular safety meetings?
  • How did each of your jobs end this year?
  • Are you on good terms with the building owner or was it a relief to both of you to end the job? If things went wrong, where did they go wrong?

You should be getting the idea of where I am going with all this. You can't tell where you are or set a course for where you want to go until you know exactly where you have been.

Compiling the info above, plus anything else you can think of that is important, will give you a clear picture of your company and how efficiently it is running. It will also tell you how good of company owner/manager you are or have become. Honesty here, gang. No bs, no rationalization, put down the straight skinny.

Now answer these questions (from Tony Robbins):

What are the key strengths of your business? Do you have a unique selling point that separates you from your competition? Write it down.
What are the weaknesses or challenges of your business?

Put this down on paper also, so you can see it, read it and most importantly, own it. We are where we are and that is a fact of life. Face it straight on.

Now let's begin to apply it to 2008.

I have been through eight cycles in this business over the last forty plus years. A cycle is from a high with a great business climate and more business than everyone can handle, down to an economy in the toilet due to high interest rates and "Oh, woe is me", then back up to "Everything is Beautiful". It is the same old story. Things repeat themselves every five to seven years.

I think we are at or near the bottom of a cycle, waiting for things to get better. But it will probably hold steady until after the next presidential election in November 2008. That said, for planning purposes it would be good to assume that 2008 will be about the same as 2007. Take a conservative approach, and if you can beat your goals and projections, that's terrific.

Estimate how much business you will do in 2008. If you have been in business more than three or four years, you might be able to forecast an increase of 5-8 percent growth, maybe more depending on your market. If you have been in business less than three years, your growth can be as much as 10-30 percent as your business becomes known. Most if not all your growth next year will depend on your marketing program for 2008.

Remember, when the economy tightens up, you must increase your advertising budget, not reduce it. Those that cut back on their advertising when the economy makes an adjustment, go away. Cutting your advertising budget to save money is like stopping your watch to save time.

I recently spent three days working with a company in Florida that is doing exceptionally well in this business climate. They have a solid marketing plan in place supported by a good budget. They schmooze and they ask for referrals. They take self-promotion seriously and as a result they will do over $6.5M this year. Best part of it is their net profit is well over 10 percent. Their biggest concern is how to get the jobs done. It all boils down to your marketing campaign.

If you aren't sure how to estimate how much business you will do next year, use the Owner's compensation method. Determine exactly how much money you, as the owner, want to make next year, and divide that number by 8 percent (.08). The answer is the amount of business you must sell, build and collect for the company to support your salary.

You now have your sales goal for 2008. Let's say you want to sell, build and collect $1.5M. That is 7 percent more than the $1.4M you sold, built and collected in 2007. The math shows you can safely pay yourself $120,000 compensation for 2008. ($1,500,000 X .08 = $120,000). That should keep you focused.

Now the question that begs to be asked is how do you get that $1,500,000 in the door? Let's assume that your overhead figures this year (2007) were 31.5 percent of total sales. Because the economy is tight and will be for the next year, and your focus needs to be on getting (or keeping) your company debt free, you are going to force yourself to maintain the 31.5 percent overhead and spend not a dime more. That is the way a disciplined and prudent company is run. Cardinal Rule #8 is: You shall honor your overhead budget at all times, and spend not otherwise. If you haven't been doing that, this is a good time to start.

Our overhead for next year will be a total of $472,500, of which you will pay yourself $120,000, and 5 percent of your total budget is for marketing. 5 percent of $1,500,000 is $75,000. So subtract those two expenses off your overhead budget ($472,500 - $120,000 -$75,000 = $277,500). We now have $277,500 to pay the entire balance of the overhead for the company.
A side note. For larger companies, you might consider hiring a full time Marketing Manager. I have read several reports about companies putting such a person in place and it seems to be working well. It is worth looking into.

Now look at what you spent and where last year, and apportion the $277,500 available to pay those bills in 2008. Make a plan to have 2008 a "No New Toys" year. Sorry, but the discipline must start somewhere and this is as good a spot as any.

Now sales. Reviewing our numbers from 2007 we find that we sold 43 jobs with an average sales price of $32,558. If you sell primarily large jobs with a few small ones, throw out the small ones when calculating your average sales price. You want the average to be as close to average as you can get.

If your sale to leads ratio is normal, you will sell about 1 in 4 leads you go on. That means to sell 43 jobs, you need 172 leads. For safety's sake, add about 20 percent to cover the possibility of more "tire kickers", "I want a square foot price", or "I am just looking for the cheapest price" calls next year. 172 plus 20 percent means you need 206 leads.

In your review of 2007, you found that your average lead cost you $73. So in 2008 to generate 206 leads, you can reasonably expect to spend 206 x $73, or $15,038 to get the leads in the door.

This is well short of the budgeted $75,000. Where does the balance of the money get spent? Part of your review from last year was to:

List all of your various lead sources.

List the leads and sales in each category.

Then, Calculate the cost of each lead in each category.
That tells you where the best place is to spend the initial investment of $15,038. Now let's enhance the number of leads that come in from each source. If you know that your web page generated half your leads last year, it would be smart to enhance your web site so you get the maximum advertising value from that page. If you do kitchens and baths, why not have a web page for each? Can you add testimonials or pictures?

Have you tried direct mail advertising? What have you tried that generated the type of leads you want? That is where to focus your money. Check the results monthly to see the results and adjust your advertising as needed.

Next week we will continue this exercise and finish planning for 2008.