Markup & Profit

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.


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