Like David Letterman, I’ve got my own Top 10 list. Unlike Dave’s list, though, mine won’t get a laugh. However, I can almost guarantee that if you implement my top 10 suggestions, this time next year when you review your bottom line, you’ll have a big smile on your face.
10. Prepare and Implement a Business Plan
The first step to improving your bottom line is to develop a game plan that specifies your goals and the steps you will take to reach it.
- Set a target for the amount of profit (over and above your salary) that you want to make for the year.
- Identify what it costs you to run your business on a monthly basis.
- Identify the amount of gross profit (targeted profit plus overhead expenses) you need to earn from work produced during the year.
- Target specific goals for all individuals in your organization.
- Monitor how you are doing in comparison to the plan on a monthly basis. If necessary, make modifications to the plan throughout the year.
9. Become a Problem Preventer
If you find that your company is often in chaos (e.g., subcontractors don’t show up on schedule, all hell breaks loose when you close out a project, you’re not paid for change orders), it is time to stop reacting to crises and become a problem preventer. Here’s how to begin:
- Identify the key crises that you battle over and over.
- Figure out what’s causing these problems.
- Develop systems to organize the functions that are causing problems. For example, develop a step-by-step checklist that outlines how information flows from the field to the office.
- Implement procedures to monitor your systems.
8. Analyze Your Financial Results
Life would really be grand if your operating expenses always equaled your budgeted expenses. But as we all know, stuff happens. When your best-laid plans fail to work out exactly as you expected, you are dealing with variances; that is, the difference between what we expected and what actually occurred.
Variances come in all shapes and sizes: the difference between the actual lumber needed for a house and what you estimated, slippage in the schedule, unanticipated cost for office supplies. Sometimes variances can be positive, but usually they are negative.
When variances occur you need to ask yourself three questions: What went wrong (or right)? Why did the variance occur? And, most importantly, what am I going to do about it? Once you implement procedures to prevent variances from recurring, you will be well on your way to a better bottom line.
7. Price Your Product Right
There are two components to better margins: pricing and cost control. Take the time to challenge your current pricing structure. Don’t be afraid to ask for more gross profit. As a professional, you are entitled to it. I would rather see a custom builder meet goals by working on fewer houses with higher gross profits than by increasing volume. The next job you bid, ask for more profit—if you truly believe you are entitled to higher margins you will probably be able to get them. Remember, in most cases, volume kills and profit thrills.
6. Develop a Job Cost Control System
A good integrated job costing system will help you control construction variances. Strive to keep variances between estimated and actual costs below 1 percent. These steps will help you.
- Review job cost reports weekly and use the information to make decisions and to take corrective actions.
- Investigate variances and make changes to neutralize their effect on job costs. For example, if excavation comes in higher than budgeted, make cost adjustments to a later phase of construction.
- Implement purchase order procedures for your material purchases.
- Issue agreements or work orders with detailed specifications to all of your tradespeople.
5. Monitor Your Schedule
Getting the job done on time keeps clients happy and improves your bottom line. Developing a system to plan out all your work before sticking a shovel in the ground and then monitoring progress will help you finish on time.
- Implement a tracking mechanism to help you identify reasons for variances between your actual and planned schedule.
- Examine the possibility of computerized scheduling. There are a number of reasonably priced software packages available that are relatively easy to learn.
- Communicate your schedule to all involved parties.
4. Manage Cash Wisely
Here are some tips on managing and maximizing your cash flow.
- Use the client’s money to pay off your trades and suppliers instead of using internal funds or construction loans. You should try to always be ahead of the customer and maximize the use of your client’s funds by taking a deposit and front-loading your draw.
- If you are front-loading your draws, it is imperative that you manage your books on a percentage-of-completion basis. This will enable you to understand and account for overbillings on your jobs.
- Take advantage of vendor discounts. It is cheaper to borrow money to take a vendor discount than to forfeit it.
- Ask your tradespeople to take a discount if you pay them prior to the scheduled payment date.
- Set up a systematic method of paying your bills (e.g., the 10th and 25th of the month). Keep “hand checks” (issued outside of check-paying days) to a minimum.
- To minimize construction loan interest, take loan draws only when you are ready to disburse the cash.
3. Develop a Series of “Two-Minute” Management Reports
The secret to a successful management control system is to get all of the information into reports that are easy to read and work with; in other words, a report that you can grasp in about two minutes. Here are some examples:
- Job cost variance. This report provides a summary of variances between estimates and actual sorted by variance reason.
- Schedule variance. This report identifies why scheduling variances are occurring.
- Operating expense variances. Done at the end of the month, this report identifies variances between your operating budget and actual expenses incurred.
2. Resolve to Hire the Best Employees and Treat Them Well
Do not be penny wise and pound foolish by passing up the best people because of high compensation demands. Once you hire the best, make them part of your team, develop procedures for evaluating their performance and giving feedback, provide them with proper training, and motivate them with a measurable incentive compensation program.
Help your employees set individual short- and long-term goals that adhere to the company’s overall goals and regularly monitor how they are doing.
1. Have Some Fun
Part of improving your bottom line may not be measured in dollars. By implementing the above tips you should also be able to reduce the amount of time and stress involved in running your building business. That will allow you to take time to enjoy life and give back to your family and to your community.
Steve Maltzman, CPA, is president of Steve Maltzman and Associates in Colton, Calif. Visit Steve at www.smacfo.com.
