“Efficiency is doing things right; effectiveness is doing the right things.”
Most owners figure that if they sold another $250,000 or $500,000 in jobs, they would reach their desired net profit and enjoy a higher standard of living. However, it’s often by plateauing that kitchen and bath firm owners can analyze how to run their business at its most efficient and profitable model.
This is true for a few reasons. First, more human errors are made with higher sales volume, so gross margins typically decline a few percentage points. Also, variable expenses such as commission and payroll taxes increase with higher sales volume. Thirdly, a larger sales team is usually needed to support an increase in sales.
In this advisory, we trim the fat from your daily operations and turn your business into a leaner, higher profit-generating operation before embarking upon significant revenue growth.
Strategy #1: Adjust the costs of your materials
The most significant cost items on any owner’s financial statement are their materials. To see where any cuts should be made, consider where your money is going.
Let’s say your business has an income of $1,760,000. It generates a 32% gross profit, overhead at 29%, and a 3% net profit equalling $52,500 after a 10% owner’s return (salary + perks + net profit ÷ company income).
Most owners don’t channel any resources toward reducing their most significant expenses. Yet, since 1994, industry buying groups have made it possible for even owners of the smallest firms to make immediate progress by creating certain products that are available at a 5-8% deeper discount.
The average 2-3% rebate on their buying group purchase equates to “found money” that owners can drop directly to their bottom line. As a result, many today buy more than 50% of their materials exclusively from fully vetted vendors affiliated with buying groups.
This will save you a lot of time and build your retained earnings. Kitchen and bath owners need to sharpen their saw to gain market share.
Strategy #2: Allocate for burden and lower your overhead
Owners should strategize to take control of their “burden” expenses. Burden expenses are all the indirect costs associated with a job that affects the gross profit margin made for that job.
Bankrolling everything from drivers’ salaries, rented trucks, and warehouses to how much time a project manager will be paid to supervise an installation are burden expenses. We teach owners how to allocate, price, and manage burden expenses at SEN Executive Business School. Email us to learn more or register for the program.
Once you see the effect burden expenses’ have on your business, you’ll notice costs that could be eliminated without changing your output quality. For example, some owners eliminate the cost of a delivery truck and its driver by using a local moving company to receive merchandise, then deliver the products at a fixed cost when the job site is ready.
Strategy #3: Use subcontractors
Owners can trim the fat off of their business by using subcontracted labor and save on indirect costs such as payroll taxes and vacations, worker’s compensation, and health insurance. Another bonus of using subcontracted work is that contractors tend to produce more volume in a year than payroll employees because they have a monetary incentive to finish quickly.
There are times when it is best to use subcontractors and when it is best to have employees. In a growing business, loyal employees – from truck drivers to sales designers to installers – may be your best bet to control and maintain customer service. But when you want to be more efficient and profitable, keep your showroom team on payroll and subcontract additional labor regardless of size.
Strategy #4: Implement a centralized selling platform to save time and money
Even in today’s market, owners have the power to increase their annual sales by at least 100%. While this is a great revelation, it hasn’t dawned on most kitchen and bath owners to quit their habit of using patchwork selling practices. That’s when three sales designers use three different sales approaches rather than a standardized one management stipulates must be followed.
Formalizing your firm’s sales process with industry-specific kitchen and bath software will empower you to scale your operations to open a showroom in other towns within a few years.
When you use DesignAlign, everyone on your team will have access to the following:
- A comprehensive, customizable product catalog with 1,000,000+ products
- Built-in social networking, including the capacity for video conferencing and email
- “Live tracking,” allowing homeowners to follow a designer’s facilitation during virtual consultations
- A responsive application optimized to work on any device
- Beautiful clean design with user-friendly, intuitive navigation
The four strategies mentioned in this article will help you create a leaner, more effective business. Your operations will be designed to handle increased business traffic and complete jobs to achieve the maximum gross profit after the burden expenses are allocated in the pricing structure and minimized. Change comes rapidly in the business world, but you have tools at your fingertips to open numerous brand-growth opportunities for your firm.
—SEN Leadership Team
Master strategic planning, selling more into each job, leveraging technology, Good-Better-Best selling, and other intelligent implementations at one of SEN University’s valued online business courses. Or contact us to attend our in-person schools.