How to Build Your Business While Increasing Profitability

Running a profitable custom installation company that constantly makes payroll and pays bills on time is a challenging proposition. The real trick is how to continue growing your company AND increasing prosperity
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If you are still in business, congratulate yourself; whether you know it or not, you are successful. Even though you might think you aren't doing well as a company, take comfort in the knowledge that you're probably doing better than you realize. The real trick then is how do you continue growing your company and increasing prosperity?

Running a profitable custom installation company that constantly makes payroll and pays bills on time is a challenging proposition. Despite your experience level as a technician or a businessman, it always seems that there are more "bad" things that can happen than "good" things at any one time. Whether you are the company's crackerjack technical expert who has decided to open his own custom installation firm, or an established company with multiple installation crews and glossy marketing brochures, the road to custom installation Nirvana is strewn with the littered bones of companies that once thought that they had it all figured out.

Those who really didn't have it all figured out, ended up closing their doors, often to re-open later as a much wiser and much leaner operation. If you can identify what might some day happen to your firm-early enough-then perhaps it is possible to avoid the pain of closing and liquidating your firm some day.

In the end, we all know it all comes down to money, or more specifically, a lack of it. Every company needs some sort of guidelines to ensure that there always is enough cash on hand. In this article, I'm offering the top three reasons why companies eventually fail, based partially on post mortem discussions with firms that have closed their doors, in our industry and others.

The "Showroom" turns into the "No-dough Room." At my previous job, we watched for the single event that often foretold a company's imminent financial demise. It was the opening or re-opening of a "grand" showroom. Several major CEDIA dealers have bit the dust shortly after their "grand opening" ceremony. First, let me state that I believe 100 percent that for certain experiential types of sales, like home theaters, lighting controls, motorized window treatments, etc., it is absolutely necessary to allow a prospective client to experience for themselves why they would want such systems for their homes. In fact, one could argue that most everything that is sold in our industry is experiential and should be able to be presented properly to a future customer. Having said that, there are smart ways to do a showroom, and "less smart" ways to accomplish the same thing.

Here are four rules for creating a bigger or better showroom than what you already have:

1) Don't use your own money
2) Use as little money as possible
3) Finish it as quickly as possible, and
4) Use it enough to return the investment.

How do you not use your own money? Either borrow the money, lease the products, or a combination of both. Resist the temptation to use operating capital to pay the bills and instead do what the real estate world has known for years-use OPM (other people's money).

Most people in the industry by now have heard my ranting and ravings about having a LOC (line of credit); use it to expand your business. If you don't have a LOC, then there are leasing companies that will lease you the equipment, and in some cases, even the cost of the build out if you are putting in a theater (e-mail me for the list). As an example, the lease payment from one company for $50,000 paid out over a five-year period, with $1,000 down is approximately $1,169 per month. Why would you pull money out of your bank and pay cash for something that should be a leasehold improvement? There are some very favorable tax implications for any lease signed before the end of the year. Specifically, look into Bonus (911) and Section 179 depreciation deductions that you can still take this year to offset 2003 income (talk to your accountant or controller). The bottom line is that you should never use your own money to build a showroom.

Using as little money as possible for a showroom involves bringing in other "partners." Therefore, create enough value for them that they might be willing to pay you for the use of your showroom. You must decide if the reduced capital outlay and access to additional clients is offset by the added inconvenience of sharing your space at certain times. You will need lighting, so find the #2 independent lighting showroom in your area that wants to become the #1 showroom. You also need art to decorate the walls, so find an artist that is willing to help advertise your showroom as their "gallery." Furniture is tricky, as you are probably selling some furniture and home theater seating yourself, and also don't want to alienate the design community. If you are doing a kitchen and bath vignette, then find a design center that is looking for a secondary location. You get the idea. Anything that you can do to bring in more customers while offsetting the cost of the showroom is a good idea if it is worth the "hassle factor."

Once you start construction on a showroom, finish it immediately. Assign a project manager to it (just like a real client's project). Otherwise, it will go on forever.

The last step preventing a showroom from becoming a "no-dough room" is to make sure that you use it such that it pays for itself. I have seen more than two dozen examples in the past year of companies that invested in a grand home theater as part of their showroom, only to discover their amazing failure in "turning" them the three to four times a year any leasehold improvement should generate. In other words, if they spent $75,000 on a theater interior and equipment, they need to sell $225,000 to $300,000 of that equipment and theater interiors each year (or other equipment and theaters that was sold due to having the showroom). Otherwise, it wasn't worth the financial investment. Make sure that once your showroom is done, you insist on having a factory representative spend time properly training your sales force on how to sell the products, as well as effective demonstration.

Poor Client Management. Most dealers who I have spoken to over the years have very poor client management skills. This is especially true of the ones that have closed their doors. Proper client management starts with the initial client meeting. These are some of the issues that should be discussed:

o What your company does well (types of systems, size of projects, new construction vs. retrofit, new technology/bleeding edge vs. proven products, GUIs, project management, etc.)

o The types of clients that are a "good fit" with your company (not clients that are just looking for "gear" and know what they want, but clients that are willing to pay for your expertise.)

o What you get paid for (figuring out what your clients want, making it simple to operate and bulletproof, finishing the job within your time commitments and under the project allowance, etc.)

o How and when you get paid (what you will do initially at no charge, timing/catch-up payments for change orders, amounts, "retainage" and when released, what constitutes substantial completion, etc.)

o What costs will be passed on to the client (not documenting changes, client not defining who is allowed to make changes, delays caused by the builder that you need to be compensated for, miscommunication by the builder, subcontractors hired by others causing damage to your work, change orders, etc.)

o How you define what you are responsible for (detailed scope agreements-email me for an example)

o How much system "tweaking" is included in your pricing (and defining when it changes to a "per request" based pricing model)

o Finally, why clients are sometimes unhappy at the end of a project (and of course, how to avoid that happening)

There may be other issues that you need to discuss, but these are the bare minimum items. Avoiding discussion about these items or postponing the discussion until a later date is just asking for trouble, although a few of the above issues could wait until the second meeting. The reality is that your clients want you to make a profit; otherwise, they know that either you won't be around in a year or two to take care of them, or you won't want to assist them when they need help because you lost money on them. Any client identified early on as a potential "problem client" that doesn't match up well with your company, or that has a problem valuing (and paying for) what you do, must be fired before you hire them. Otherwise, you'll end up tying up your resources servicing someone who you probably won't make any money on anyway, and who will be unhappy when you are finished.

Learn to be brutally honest, and if you don't feel that a prospective client is suited for your company, consider referring them to a competitor who may prove to be a better fit. And if it turns out that the client truly is a real problem, perhaps your competitors won't be as quick to figure it out.

Measure Nothing, Fix Nothing. Every company has things that they aren't doing correctly or areas that could use more attention. Every time I visit a dealer (at their request and at no charge) and spend some time looking at their business processes, it is easy to come up with a list of at least five areas for immediate improvement. The problem, however, with anything that you want to fix is this-without a means to measure how you are doing, you don't know if you have fixed something or made it worse. If a window is broken, your "measurement" of whether it needs to be fixed is simple-you can see that it is broken. The determination of whether it has been fixed or not is also simple, just look at it.

With business processes, it isn't that easy. Past owners of custom installation companies that closed their doors too often are heard saying, "I didn't know I was in trouble until it was too late." Not having a "report card" to reference and determine how you are doing is like trying to fly a plane without any instruments; it isn't enough to know that you are somewhere in the air and therefore must be safe. Rather, you need "relative" information about your speed, altitude, angle of incidence, heading and other information. Some custom installation companies are flying by simply "being in the air" instead of knowing which way they are going. Ultimately they lack the information necessary to stay airborne, and they crash. If you don't know if something is broken (or becoming broken), then obviously you can't to fix it. If enough things become broken, your firm goes out of business.

So what is the "fix?" Well, let me tell you what it is not-spending a lot of money on a sophisticated project cost accounting system that will allegedly give you all sorts of "real" data on your specific projects. If you have a full-time controller and employees that understand that for job costing software to work, it means that every activity needs to be related to a project of some type (even internal projects), then by all means spend the money and go for it. Most companies, however, don't need to do this. Instead, determine at a very basic level what information you'd like to have that would help you ascertain that your company is getting better or worse in crucial areas. Pick a few critical metrics on both the revenue and expense side of the equation and start by looking at how you can measure them. Not absolutely, but relative to how you were doing. Knowing that your installers are running at an efficiency of 68 percent overall is far less important than knowing that they historically ran at 63 percent and now they are clocking in at 68 percent the past two months. Keep in mind that your measurement of an item may not relate to another custom installer's measurement of the same item because you might calculate the numbers differently. Using the efficiency example above, your measurement may include vacation time and time off for sick days while another dealer may choose to ignore those time periods, thus inflating their efficiency metric. Remember, you only care about one thing-are you getting better or worse?

With that thought in mind, here are some simple (and not so simple) things to measure. Feel free to modify them or add your own metrics. Make the measurement period monthly, and start with an aggregate total measurement. Break them up into individuals or teams once you are comfortable with the data:

o Total Money Proposed. This tells you how you are doing finding new business. Make sure that you define what is included (are you measuring equipment only, or equipment and labor, or measuring them separately?) If you lump them together you might get erroneous data because an increase in what you charge for installation services might offset a decrease in equipment dollars caused by falling prices.

o Total Money Initial Deposits. This tells you how you are doing closing new business. Having this information without the first number (money proposed) isn't worthwhile because if this number is falling, you wouldn't know if it is because your closing rate is falling or you have less "at bats" with prospective clients. Not knowing the correct reason might mean that you take the wrong action (increase advertising, for example) instead of identifying why you are losing more projects (non-competitive pricing, hostile salespeople, etc.)

o Total Money Backlog. This is uncompleted contracted work not yet billed for. Not measuring this is suicide. Why? You could be closing a lot of jobs and be flush with cash because you are eating into your backlog and not because you are closing any new projects and generating future business.

o Average Gross Margin (by product family/category). Once again, lumping this into one barrel can be misleading. Let's say that your average gross margin has fallen from 35 percent to 33 percent the past month. All you know is that you have a problem (which is good), but you don't know where it is. If you track this by product family, you can decide to de-emphasize items that perhaps you are making less money on and emphasize items that are more profitable. Ultimately you want to be able to measure average net margin (what you actually take to the bank), but that is more challenging to calculate or estimate.

o Average Size Project (based on deposits). This gives you an idea if the number of clients you need to be staffed up to deal with is going up or down, as well as your vulnerability to future delays in projects. If this number is decreasing, this means you have to gear up to handle more projects OR reverse it and try to increase the average size project. If this number is increasing, you might be attracting certain types of projects based on your pricing or marketing at the expense of quicker turning, smaller projects.

o Average Completion Time/Money (measured in work days to finish the project divided by the amount of money received for that project). This is calculated from the day you receive a deposit, to the day the project closes-you receive your final payment. Concerning projects for which you never receive final payment, calculate the time period to the day you believe the job was "finished," and deduct the money you never received. The goal here is to move the number downward, which means you are getting better at turning jobs quicker. What happens when project managers complain that certain builders take too much time and therefore skew the number, especially when you go to individual or team metrics? Great! Now you have feedback on which builders are costing your company more money-learn to charge accordingly. At least now people are voicing their opinions and pushing to get jobs through the system faster.

o Installation Efficiency Ratio (money billed for divided by labor hour money paid). You need to have a number higher than 1.0 and climbing. Once again, what about the unfortunate installation crew that gets stuck dealing with the first-generation hardware monstrosity designed in by someone in sales? In the past, why would they say anything to management? They got paid regardless of what happened. Now, if their bonuses or compensation is tied to making their efficiency ratio climb higher, they will complain loudly and perhaps even refuse to work on certain salespeople's projects. From management's perspective, this feedback is invaluable.

If you set up a system to begin tracking and measuring even a few of the above seven metrics, you will quickly begin to see major operational improvements and more importantly, be armed with the information that will allow you to make informed business decisions.

In the final analysis, running a profitable custom installation company is hard. Taking care of the above three areas won't guarantee that your firm will never go out of business, because a host of other things can go wrong. If, however, you follow the blueprint I've laid out, such that you actually take care of the above issues, and you still have to close your doors, I'll make the following offer: come to Florida (preferably during your Winter), and I'll buy you dinner. Hopefully, you will never have to take me up on my offer.

Rick Schuett is executive vice president of Acoustic Innovations, a past 6-year CEDIA Board member, and a current member of CEA's Board of Directors. He welcomes comments and questions at either ricks@acousticinnovations.com or CEDIAdude@aol.com.

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