When someone who has worked for years in the residential systems contracting business decides it is time to take that experience to the next level and start their own business, it can be a mixed bag of emotions.
Where will I get the working capital? How will I establish relationships with manufacturers? Which employees are available who will provide the desired talent and personality (for management, sales, design/programming, and installation) to ensure success? Where should I locate the business, and how much space do I need? What volume will I have to achieve to cover the basic costs of starting a business? And the list goes on.
At this stage, the business is basically evolving around one individual and their dreams and ideas of how it should take shape. It’s the great American dream, and it should be. The business owner makes most decisions of any consequence, which include, but are not limited to, every sale, product purchased, installation scheduled, computer system installed, etc.
Having survived the first year and perhaps the second, and with the business now approaching $1,500,000 in sales and installation, things start to get out of control. The business is making money, but the profit is not what the owner had in mind at the time he began this exercise. And worse yet, somehow the profit that their accountant said they made for the year isn’t showing up in the checking account. In fact, just the opposite is true.
Rather than having more money, the one- or two-year-old company has less. This can be depressing when considering the time, effort, and worries associated with reaching this level. So, they ask themselves how they can increase sales to the next level and eliminate these pressures.
One of the major problems is that the business owner has never formed and run a business before. It’s all new to them. And there doesn’t appear to be a lot of people who can provide answers to their concerns. Well, here are some of the things I would do if I were in their shoes:
The first step toward achieving business growth is preparing an expansion plan. In this plan are several elements that I speak of often. They include the next 12 months’ income projections, cash flow projections, collateral available, and a monthly breakeven analysis. In general, this is called a financial gap plan. In a financial gap plan, what you are asking, specifically, is how can I grow to a larger business and what things will change?
First off, can you find a good salesperson that will take you to the next level? This should be a person who knows what building relationships are all about, understands the principles of profit in our industry, knows when to say no, and is a self-starter who will not need day-to-day management. Are you aware that good custom salespeople should sell at least one million annually themselves? As a side note, I find it interesting that as I discuss pending sales with custom salespeople I find that most can easily outsell their company’s ability to install these sales. They know this could be a serious performance problem for a well-respected business. Are your salespeople capable of this type of understanding and performance?
Will you have the physical space to accommodate the next level of sales? You will need more inventory space to stage customers’ equipment. You will need additional management and a space for them to work. Where will the new salesperson sit? In addition, you will need at least another installation crew. If this requires a completely new space, you will need to secure new funds from lenders to pay for leasehold improvements, displays, etc. If this is a secondary warehouse to augment the showroom, you will also need similar funding. How will the monthly payment on this expansion fit into your existing budget?
To record an additional million dollars in sales, you certainly will need a new truck/van and two installers to go with it. This adds to the level of debt service, also. Incidentally, if cash is tight, do not buy vehicles using short payment terms providing little or no interest. Take five years with low interest. It is better for cash flow.
The first step in expanding the business, oddly enough, is taking your expansion plans to a lender and explaining in detail what you need in funding and how long you will need to finance it. If you do this correctly, the project probably will be encouraged by your bank.
Many people believe that reaching the next million is mostly about advertising or some form of marketing strategy. I find that in watching my dealers grow, they spend less money each year on direct advertising and instead focus on promoting the business through the appearance of the showroom, the brochure, the professionalism of the sales presentation, their web site, home shows, etc. The one thing that instills confidence in a consumer is the quality of work demonstrated by your past performance. Our industry does need some level of institutional advertising and promotion, but most often the growth is a direct result of repeat business from satisfied customers. If you get this right, then everything else falls into place.
One of the easiest ways to create more sales and more profit from sales is to take a serious look at what manufacturers’ products you are selling and for what profit. With video making such a serious impact on our volume, the tendency is to sell products in this category regardless of gross profit and assume that with adding highly profitable custom materials, electronics, speakers, etc. everything will be all right. I constantly prod my dealers to review relationships with manufacturers in their individual markets, look for weak areas of profit, and spend time trying to find a better product solution for the weaknesses. Many video products provide respectable profits, so you should not accept status quo. In addition, it is also a good idea to try to sell higher performance electronics, speakers, etc., which result in higher sales dollars. Simply selling larger contracts will result in a substantial increase in sales.
In addition to increased dollars in products, don’t forget installation fees. Our industry often undersells labor as though it is not as important as equipment. Today labor is often the single biggest product purchased by the customer. Successful dealers are not afraid to charge respectable fees for design/engineering, programming, and installation. And, remember that the larger the contract, the greater the risk. As such, you need to make sure that you will end up with a 50 percent gross profit margin on this category of sales. Most of my clients already achieve this and have for years.
So, what would I do to create the next million in sales? I would plan to expand by learning to use financial advisors, bankers, and accountants to augment my lack of understanding of working capital and business in general. I would focus on sales growth from existing clients, find talent to add to those sales, and avoid sales you know are not going to be profitable. Try to develop a working organization chart that allows you as an owner to begin delegating areas of the business, and avoid micromanagement. Start concentrating on the conceptual management of your business instead of getting lost in the details. Sooner or later you need to depend on those talented people working for you and become the creative source for the business direction.
Darrell McComber ([email protected]) has worked for 27 years in the audio/video industry as a management consultant/accountant. He lives in Warrenton, Virginia.