In dealing specifically with the management and fiscal issues of residential A/V systems contractors on a daily basis, I am often asked how these types of companies can maximize their profit potential. The scope of such a question is huge and the ability to answer in great detail in this article is limited. In this article, however, are some of the most serious issues and the steps I would take to resolve them.
Contract Management: For years the industry has been transitioning from retail with limited installation to an industry that installs a vast majority of its products. As such, the up-front agreement with the customer also has transitioned into a contract for these services and products. It is the management of these contracts that poses the most serious problem I see in the industry today. Many of contracts are poorly written, not clearly explained to the customer and inadequately managed. Many of my clients work continuously toward perfecting this legal arrangement to protect all parties, but many do not. Most people make a good attempt to establish this up front with the customer, but thereafter things seem to fall apart. Here are some examples:
Change Orders: If the contract calls for additional funds for changes to the original agreement, the company needs to make sure that the customer is aware of, and agrees to in writing, these changes and the method of payment for them. For instance, when my clients write a change order it must be approved and paid for at the time of the request. Often, even though change-order procedures are instituted, procedures are not followed, and the change order is not paid until the end of the contract. Then you not only have the final retention of the contract to collect, but the additional change-order funds to collect as well. Customers memories are short, and often a dispute arises about project changes and their related costs. Our legal position is questionable, at best, for these funds.
Contract Cancellations: Although the customer enters into the agreement with the company in good faith, on occasion they become dissatisfied with the performance of your company. In some of these instances you may find yourself terminated from the job, and another company is hired to complete the project. This may seem unlikely, but it happens often. I seldom see provisions that protect the contractor from default. Even if they do not have to refund the existing deposits received but not yet earned, they often lose the most profitable portion of the contract, which is the equipment phase, and final payment of the contract. It doesnt take many of these issues to consume all of the working capital of the company, and you could be in big trouble.
I suggest that you rethink the use of a contract, and instead use what we now are calling a purchase order agreement. This agreement explains in great detail what the customer is committing to, what time and money are devoted to developing his specific custom job, and that any funding received is not refundable. In addition, it clearly explains that they are buying all labor and equipment at the onset, and any attempt to go elsewhere prior to the completion of the contract would deny the company its anticipated profit from the job. As such, should the customer change companies during the job, they will be required to pay 25 percent of any unpaid portion of the remaining contract. Contracts are what drive this portion of our agreement, and under many states laws, the purchase order agreement is a better way of protecting the company and the cash flow of the business.
Managing Installation: Some companies working with me are able to install and bill $5,000,000 annually with a total employment staff of 16 people, including installation personnel. Similar companies require 24 people to get the same job done. Obviously the ones who manage their installation and management costs are the ones who double the standard industry net profits. I realize that geography and the types of jobs undertaken have a lot to do with these results, but it still has a tendency to raise my eyebrows. Here is some feedback on why this occurs.
Well-run companies meet weekly with salesmen, installation management, sales management, design/engineer/programming, and management. They review jobs in progress and jobs being proposed and assist management in the most efficient use of the installation staff. They also use the forum to project cash sources for future obligations of the company.
Companies with departmental accounting make it a point to have installation/design/engineering/project management a profit center of its own. This department concerns itself with expenses associated with the installation department, not with administrative expenses. When you specify boxes and related materials on a contract, seldom will this vary throughout the contract except for change orders. Labor, however, has a way of being the Achilles heel of residential systems contractors. I have preached forever about two major issues associated with labor.
First, most custom contracts associated with installation average between 20 and 25 percent of the overall contract. If this is not considered a very important area in which to be profitable, then I dont know what is. Very few other areas in the contract have such impact. Second, without achieving a gross profit of approximately 50 percent from this department from installation/programming/design and engineering, etc. the gross profit margin on the remaining contract is dramatically affected. Companies with little or no profit overall usually can attribute this from the inability to sell enough labor and manage it efficiently.
Cash Management: If you take the time to project income and expenses, make sure you also take the time to project cash flow. This is how you limit emotional decisions relating to cash management that can hurt you. Some decisions are made without proper funding. For instance, purchasing company autos and trucks during the year that have little or no interest associated with the contract and payment terms that are too short can often result in paying back more principal on these purchases than the projected profits allow.
Purchasing software/hardware and computer development fees in the same instance as described above also is often done without looking at its impact to cash flow.
This amount can soar when you are unaware of the aging on accounts receivable, which often results from poor change-order procedures. In addition, when companies perform service and incidental finish up work, the process of getting out the final retainer or the service invoice is often delayed for months.
Finally, here are some thoughts that should help to improve your business success. Always analyze your choices in manufacturers with several thoughts in mind. Are these products going to enhance my image in my customers eyes? Can I expect a decent profit from the manufacturers that I have selected for the company? Are these choices allowing me to be more important to fewer manufacturers which results in additional financial benefits from them or the buying groups they represent?
The residential systems contracting firms of today are positioned to make a good deal of money. They must, however, learn to operate their businesses with better management skills and not simply react to them. Make sure that you look at your financial statements and the impact of working capital on the business on a monthly basis. Cultivate experienced lenders, make them your business partners and enjoy the success that you generate.
Darrell McComber ([email protected]) has worked for 27 years in the audio/video industry as a management consultant/accountant. He resides in Warrenton, Virginia.