How to Net Profits - ResidentialSystems.com

How to Net Profits

Author:
Publish date:
Social count:
0

According to Keith E. Davis, D2B (Dealer to Builder) manager of AVAD, LLC, the aviation industry and the custom installation industry share something in common.

Im a pilot, and the old joke is: how do you make a small fortune in the aviation business? You start with a large fortune, Davis illustrated. Its kind of the same, I think, in the custom world.

Remaining profitableand eventually maximizing the profitability of your businesssounds simple: You start with the basics: top-line revenue versus expenses. You want to be growing the top line faster than you are growing the expenses, explained CEDIA president Ray Lepper, who also heads Home Media Stores in Midlothian, Virginia. If the top line is growing, but the margins arent, companies wind up working harder to cover expenses. If your expenses are growing at the same time in order to support that higher revenue line, then you are going to be caught between a rock and a hard place pretty soon. You keep trying to build the business, but you are not making more on every dollar, youre making less, and you have to spend more to support that revenue. Pretty soon, you find yourself with nothing at the bottom line.

While this applies to businesses in every industry, custom installers face an additional challenge: the decreasing price of technology. We need to be moving in the direction of making more money, top line, off of our services and better margins, and acknowledge that products are going to be a smaller portion and a lower margin, Lepper declared. Take a look at a house: the labor is more than the material. What you are paying for is all of that skill to turn those materials into something more valuable.

One of the biggest profit drains is the fact that custom installation is, well...so customized. There are those out there who are very successful in that upper echelon, and they have found that little niche market, and it fits them to a T, Davis said. But the majority of the dealers in the market need to be in a different marketplace than that.

Those companies that do not specialize in the highest end of the market should be packaging their systems to promote efficiency, Davis argues. Be consistent with what you are selling, even to the point of creating packages that are used over and over again with products that you know work well together. Custom is a lot of fun, but there is not a lot of money in it. You can do a tremendous amount of revenue and keep very little of it because you are reinventing the wheel all of the time, he said. Sell technology packages and give the client certain options and upgrades, but thats it. If it gets out of that realm it becomes a custom project, and then pricing goes out the window.

Arguably one of the most difficult aspects of quoting a project is determining how long it will take to complete. Companies tend to tackle more than they can undertake, not realizing the time commitments that are required to do a certain project, Davis observed. Many times, we will look at something and say: OK, I can do that in 10 hours, and it takes 25. Who is paying for that extra 15 hours? You are; your customer isnt.

As a result, companies must be skilled at determining client requirements at the outset of a project. You are in business to satisfy customers needs, and customers pay well for having their needs met, said John R. Broomfield, president and CEO of consulting firm Quality Management International. First of all, companies mustnt assume that they know the customers requirements; they must take the effort to discover what those requirements are. Quite often, the customer needs help in translating their needs into requirements, which is the job of the designer.

We need to know about the scope of work before we start so that we can accurately ask the client to pay for the right amount, Lepper agreed. These are all things that good construction and contracting businesses have learned to do, so its not like we have to invent any new wheels. We just need to become good at existing skills.

Including employee management. You need to have high efficiencies, meaning that your people are trained, they get their work done and on schedule, Lepper said. You also need to practice good utilization: if I have an employee that I pay for 40 hours a week and I can only bill him out for 15, I have lousy utilization. Its hard to charge enough per hour for those 15 hours to cover his costs and make money. We have to get very effective at deploying our people.

Otherwise, companies end up paying for personnel thatthrough no fault of their own arent doing the business any good. You are in business to satisfy customers needs, and customers pay well for having their needs met. If you have people in your company doing something other than that, it is a waste, Broomfield said.

Everybody should be focused on helping the organization fulfill the customers needs and putting cash in the bank.
The cyclical nature of custom installation should drive companies to diversify, thus increasing their chances of reaping more profit. Seek out different profit centers; dont put all of your eggs in one basket, Davis advised.

Should you have a remodeling segment, a new builder segment, a custom segment, a programming segment, a design and engineering segment? At the same time, each division should be a moneymaking venture. You want everything in your business to bring profit, not just offer support, or that is a cost center.

Carolyn Heinze (carolyn@carolynheinze.com) is a freelance writer/editor.

Related