“Profit is not an event. It is a habit.”
Kitchen and bath firm owners often focus too much on the top line.
We all want to know how much business “the other guy” is doing. It’s tempting to ask other dealers what kind of sales volume they generate. However, sales volume isn’t an accurate indicator of how healthy a business is because revenue size is not an accurate indicator of business success. It may seem like a good idea to lower your prices in order to draw people into buying your product, but that is precisely the opposite of what small business owners should do.
By annually budgeting your business, you can really begin to scale it.
Don’t give it away!
Owners who think discounting their prices will increase sales are in for a rude awakening. Discounting can turn into a death spiral.
When a recession sets in, cutting back on expenses is the smart thing to do. But, by itself, it won’t save a business from going under. It’s not unusual for a kitchen and bath dealer to panic and discount a few jobs in a row before cutting back on overhead. While cutting back may allow a dealer to deposit a few checks and pay some bills to keep the business afloat, they ought to refuse the temptation to make severe cuts in marketing because that would spell the beginning of the end for a business during a recession!
You can spot the signs of a business going into a death spiral when the owner:
- Hasn’t learned to budget their operations properly. You can’t know where you stand if you don’t know your business’s numbers to the core.
- Doesn’t focus their entire operation on amassing gross profit dollars.
Develop a structure to your pricing with a budget and profit will follow
In a survey of 200 kitchen and bath dealers administered by SEN, in collaboration with Kitchen & Bath Design News, 83% reported they do not prepare an annual budget for their business. If businesses continue to avoid annual budgeting, they will not develop into an engine for genuine wealth.
SEN has seen it done over and over again by kitchen and bath dealers nationwide; an owner’s pricing stems from what their favorite cabinet representative tells them how all his dealers price their jobs. It’s no wonder that so few independent dealers have been capable of expanding with multiple satellite showrooms!
Consider a typical rationale: dealers should discount their cabinets by 20% and mark up their countertops and labor by 20%.
In hindsight, it’s as plain as day that the only person who profits from this sort of pricing is the cabinet rep. The rep’s commissions will soar unless the economy goes south, as it did in the fall of 2008.
It’s not sensible to try and compete with big box stores’ low prices. You can stay in the game by adopting a strategic differentiation plan where you earn a premium price for your kitchen and bath sales.
That’s right, smaller kitchen and bath firms want to do the opposite of the big box stores and raise their prices! Not only raise them but increase them considerably. That’s how you will generate more gross, and ultimately, net profit for your firm!
Adopt a new mindset by establishing good business habits
Your European counterparts are averaging 47% gross profit margins. In contrast, RICKI reported just a few years ago that US dealers only achieve 29%.
To approach this astonishing 47% metric, owners need to wrap their minds around the reality of charging more for their products. For those not in the know — charging more seems counterintuitive to success. However, skeptical owners will be doing themselves a favor by wrapping their brains around this truth.
Owners who discipline themselves, and incentivize their teams to focus on accumulating gross profit dollars, will come to recognize how net profit generates measures for strengthening their firm. Consistent healthy net profits year after year build a company’s retained earnings. And retained earnings are essential for growing a business and preserving it.
- Grow your business: have ready cash to fund business opportunities in vital areas such as marketing, personnel development, new operational systems, and satellite showroom displays. The goal should be 12 months of fixed expenses parked in an interest-bearing, liquid portfolio; a market-rate owner’s salary must be included in that total allocation.
Retained earnings finance revenue growth and enhanced profitability, which allows a company to capitalize on new opportunities. For example, the new standard in producing kitchen and bath industry sales is DesignAlign’s Good-Better-Best Selling System platform.
The benefits of Good-Better-Best selling have been written up in the likes of Harvard Business Review and Forbes for its edge in driving up profits. The efficacy of Good-Better-Best selling strategies has been proven to work in our kitchen and bath industry for decades.
Our European counterparts can build up their retained earnings from their average 47% gross profit margins to typically finance 15-20 satellite showrooms apiece. The US kitchen and bath industry have a lot of catching up to do in this regard.
- Preserve your business: have the funds to survive during recessions—consider this a precautionary measure similar to your health insurance. You don’t want to have to use it, but you never want to need it and not have it! Quite simply, it’s a responsible business protocol to stockpile funds in case of disaster.
Between 2008-2009, the kitchen and bath industry lost thousands of dealer and design/build firms for one of three reasons:
- Owners didn’t charge a high enough price for their projects.
- As a result, they didn’t produce sufficient net profits for multiple years.
- They did not accumulate earnings equivalent to 12 months of fixed expenses (separate from their retirement accounts)
At this point, you may be asking: what are the good habits to get into so I have enough retained earnings to grow and protect my company?
Know your key economic driver
SEN has long talked about the economic driver because knowing your economic driver is crucial to generating your business’s earning potential.
SEN researched through 71 years of financial data volunteered from 13 SEN Member firms and found a consistent pattern emerge with all of them. Each business had a 92% probability that their economic driver is gross profit dollars divided by payroll expense. Because when the economic driver hit — or exceeded — a ratio of 2.2, every one of those firms experienced their greatest annual net profit.
As covered in detail at the SEN 4-Day Executive Business School, you must reverse engineer from the desired net profit to determine the required gross profit dollars when preparing your annual budget. In doing so, you will see it pays for the following:
- The burden expense
- Owner’s market-rate salary
- Market-rate team salaries
- All the selling and administrative expenses
- Warranty and interest expenses
- Net profit of firm (ideally 8 to 10%)
Determine your bottom line
Only when an owner knows the net profit their firm is achieving, do they have a true handle on the direction their company is heading.
Net Profit = Revenue – (COGS + Operational Costs)
Your net profit margin is how much profit your firm has generated after all expenses are paid. Track your net profit on your Profit and Loss (P&L) statement. It’s one of the three major financial statements you should aim to master.
There’s an art to presenting price effectively—scale your operations!
Attendees to our 4-Day SEN Executive Business School happening November 8-11, will learn, among a lot of other things:
- How to create the correct price formula for securing a 10% company net profit
- Where to invest in your business to earn the biggest returns
- How to present the shock-proof method of price presentation so you can charge more for your projects in support of earning the desired 8-10% pre-tax net profit SEN advocates
SEN Design Group is the only industry-specific resource that teaches how these three key disciplines — finance, marketing, and sales — are to be integrated and mastered. And the full spectrum of this exclusive, core knowledge is taught only during this four-day event.
This unique educational program is for business owners, partners, and general managers who are truly serious about scaling their kitchen and bath design operations!
Visit the SEN University events calendar for more information about what’s coming up next at SEN!
—The SEN Leadership Team