[EDITOR’S NOTE: VITAL holds monthly CI Business Mastery Classes where it addresses important CI business topics via a webinar. Each class is supported by an industry brand. VITAL has agreed to share some of the information from these classes in a monthly column of highlights from its most recent webinar. The fourth CI Business Mastery Class was on profit levers, and it was supported by AudioControl.]
Today, we’re going to take a deep dive into some of our industry’s profit levers — including which profit levers matter the most and what to do about them. We’re going to talk about levers in a business that translate small actions into bigger results. It is truly the secret behind the success of our VITAL clients and how they’re able to produce consistently better results than the industry averages.
Why do we need levers? The three most important outcomes in the business are driven by pushing on the right levers: revenue, profit, and cash. Those are driven in the integration world by the primary levers — mix and margin.
Profit Lever: Mix
Integrators across the country break down the mix of what we sell in different ways. In the VITAL world, we break it down simply to equipment, parts, and labor.
Equipment, parts, and labor generate different margins, with the equipment being the most stable and predictable (although, with the number of price changes lately, that could be argued). How much payroll you pay to get the work completed is referred to as compensation, and that is a very key metric and lever to push in your business — how productive the people are that you deploy. This is a commonly chased measure and lever that substantially impacts your overall results. How much expense do you incur to complete the work? What are the major operating costs in the business to keep the doors open? How much working capital in terms of accounts receivable in inventory are you carrying in order to generate that cash? How much fixed assets, vehicles, building showroom tools are you deploying in your business?
More VITAL Business Tips: More Profit = More Solutions
How you leverage these last two is massively important for managing the cash flow in your business, and we will cover them in future columns.
The way you bid the productivity of your team and how you pay your people are the primary drivers of low profit performance throughout the industry. When you get these things right, all three of them, you are well on your way to doubling the industry average for profit performance.
Profit Lever: Margin
Gross margin is the number one profit lever in the business, and achieving a predictable gross margin requires intentional bid practices. The gross margin on your equipment is well defined under normal circumstances in your proposal system. You typically know what you’re buying the equipment for and what you’re selling it for.
Parts, however, can be a little more nebulous because they’re typically bought and sold in bulk. Their usage is not always tracked on a project. How many HDMI cables or Cat6 connecting cords or wall plates do you use? In many cases, it doesn’t make sense to track them at a deep level. Those parts also experience frequent price changes that we are rarely ever made aware of, like we are on a lot of equipment.
The biggest variable in your proposals and in your business is labor. The number of hours that a project will take to implement is an educated guess at the very best, and so that needs to be explored a little bit more.
As a way of definition, equipment is the stuff that your team gets excited about selling and your customers get excited about buying. Parts are the things that make that stuff work and are typically bought and used in bulk. Labor is the unique value that your company brings to that equipment and parts. And the mix defines the percentage of revenue in each of these categories. The most common, VITAL sales mix recommendation is 60 percent equipment, 32 percent labor, and 8 percent parts.
Each of these categories contributes a different percentage of gross margin, and for the sake of discussion — and to align better with what your proposal system is telling you — we are including labor costs in the gross margin calculation. And we’re assuming about a 50 percent margin on labor, which, based on a lot of conversations we’ve had, seems to be what most of you are using in your proposal system.
The Rule of 47
The Rule of 47 is not perfect, but it’s really good — 47 percent being a good target for blended margin. Here’s the trick: You’re going to go into your proposal system and you’re going to add all the parts and equipment that you need on a job. You will get your whole design squared away, but you will ignore the labor calculations built into your proposal system.
So, for example, say you’ve got $27,200 of equipment and parts in this sample project; if you multiply that times 47 percent or 0.47, you’re going to come up with a good labor target at that point. Now many of you will find that, when using this calculation, your labor is going to come in higher than before, and then you’re going to get scared and think, “I don’t know if I can add more labor to this job because I don’t know if I’m going to sell it.” Guess what? You can do it. We see it over and over again. And the biggest opportunity from a profit percentage standpoint in our industry is charging what we’re worth for labor.
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Equipment margins alone cannot sustain your business, nor will you be profitable enough to invest and give back — this is especially true for those of you who sell at less than full equipment margin. You must sell at full equipment margin every single time and have great labor margins to produce reliably consistent high profit in your business. Remember, labor is the unique value that your company is adding to all that equipment and parts. That is the only reason your customers need you. They can buy all this stuff elsewhere.
The single most common reason for underwhelming profits in our industry is labor margin squeeze that happens when your proposal meets the reality of getting that work done in a timely fashion.
Next month, we will deep dive into gross profit and payroll and compensation.
Each month, a different CI Business Mastery subject will be addressed. Participants will receive a CI Mastery Business Class Certificate at the end of the 12-month series. Dealers can register for live and recorded sessions at https://growwithvital.com/