Respect the Numbers
January 3, 2008
The foundation of having a successful restoration business lies in the numbers; if you don’t truly respect the numbers, don’t expect the results! When you complete your financial analysis, whether it be weekly, monthly, or yearly, it is important to sit down and look at why the numbers are the way that they are. The numbers don’t lie, and they should impact the way that you conduct your business. If you approach things ignorant of obvious financial facts, your business decisions – or lack thereof – and your results will directly mirror just that.
One of the biggest financial mistakes restoration companies can consistently make is their reaction to storms and large emergencies. You can lose more money during storms than during a regular work day/week/month for several basic reasons. If a storm occurs and you do not already have a system in place, you end up raiding your normal business by pulling all of your employees out to do the storm job, and will consequently drop the ball on your existing business.
Successful companies handle storms and large emergencies by having two key elements in place beforehand: a playbook and an independent storm team. The playbook is created to layout the procedures, systems, and processes to be followed in the event of a storm or large emergency. Once the storm or emergency hits, the playbook would be used as the go-to guide in order for the job to run smoothly.
The reason I believe a specific manager and independent team is required to handle storms is simply because your clients are what make your company profitable. Due to a storm’s unpredictable nature – and the fact that it would be classified as new business – you cannot expect all your employees to drop existing business in order to accommodate it. You need to be fair to any existing customers and give their job the time and attention that it deserves if you want:
- Any repeat business, and,
- To keep ongoing insurance clients happy.
The numbers also need to be the basis for key decisions. The numbers tell it like it is, and will give you an accurate depiction of what really is happening in your company. I realize how basic this sounds, yet it’s important point that deserves to be reinforced; I am constantly amazed with the number of companies who don’t operate their business by the numbers.
One of the most important aspects of operating a restoration business by the numbers is bringing your overhead in line with your revenue and expected net profit, not the other way around some companies seem to do. The three main target areas are:
- Accounting, assessment, and development
- Cost and expense controls, and
- Budget vs. actual controls
To calculate the revenue you need to generate, start in reverse with the net percentage you want to make and deduct your overhead from this amount; this will leave you with your gross profit remaining. Now deduct your direct expenses to provide your overall revenue. By having a clear picture of your expenses, you can maximize your resources in accordance with your bottom line and not keep expending more resources every time something goes wrong. You will have to accept that you must make do with what you have or make the necessary changes in your business model to achieve your goals.
As we all know, profitability stems from a company’s ability to produce and sell more at the lowest possible cost with maximum profit. In order to effectively ensure that you are profitable, you have to make many choices. For example, using employees versus sub-trades. Using more sub-trades – especially now that more quality subs are now available because of the decline in the new home construction market – provides an even greater ability to control labor costs. The basic goal for any financially successful restoration company is an increase in net profit. In order to increase your net profit you must also increase your overall efficiencies and gross profit; conduct yearly planning and monthly detailed reviews; set benchmarks with measurable results; keep critical controls like written workflows, financial agreements, invoicing, collections, cash flow, and job costing in check and, finally, have appropriate and effective consequences if goals are exceeded or not met.
So how do you begin altering the way your company functions in order to enhance your bottom line? The first critical step is to focus on leadership and management and break it down based on why it is set up the way it is, how it is currently working and how effective you are. The crucial question to begin with is what type of company you are now. Do you respond and manage like an emergency, or are you problem driven and solution focused? Are your manager’s good leaders with strong leadership skills or do you need to improve this? The important goal to establish with your managers is the “good to great concept.” You do not want to have people micromanaging every company decision; if this is how you function, you most likely have the wrong people in the wrong roles. How are your managers making decisions? Do they base their decisions on vision, values, goals, or something else entirely? The managers must be perceived as being rational and logical leaders, as you need to have the company personnel want to follow them.
To gain more insight into the manager’s specific managing style, it is very telling to find out their history and where the management experience, education, or training comes from. In my experience I have come to understand that there are two very different management histories: formal education and training-to-manage, and the School of Hard Knocks. Both backgrounds can bring valuable elements to your management team, but the key is in their actions past and present; this work history must be leveraged to build your core team thereby your restoration business.
Besides focusing specifically on numbers and management, it is also important to analyze how your business operates. Have you ever analyzed your business? I mean truly analyzed your business and your people? Do you have the right people producing what you need? Successful restoration companies have the right people in the right roles being productive, responsible, and held accountable for the duties their job demands. It is also essential that you have the right systems properly implemented and dedicated at all levels of the company. Knowledge of all products, services, internal and external procedures and expectations clearly separates successful companies from their less successful counterparts. Continual training needs to be included, as technology and the marketplace is constantly changing, and each company must be willing to adapt as the industry requires not as they might otherwise wish. Have your workflow, sales processes, and procedures in writing for all applications. In other words, best business practices need to be fully implemented, as it is important to have the focus and discipline to do what is right every time.
In any analysis the owner and/or general manager must ask themselves if they really do want to grow and build their business, or just take advantage of what is already there. What I mean by this is, most companies have a true closing ratio of approximately 25 percent from the time jobs are estimated to the time they sign. It is our experience that this generally occurs because there is poor follow-up and a lack of the closing skills needed to complete the jobs, due to the complexity of all the relationships and job requirements. It is not always necessary to get more business in the door, but the need to close more of it. For example if you only closed one more deal out of 10, it could add additional revenue of as much as 30 percent to 40 percent.
This is the bottom line, and it’s what it’s really all about.
It is always surprising to me when I talk with companies and ask them how they are doing. Most of their responses have to do with revenue. Instead, let’s start talking about net profit, a bottom line focus, as that is what is important, and not how much is coming in the door. It’s about how much money we can keep at the end of the day. This has to become the main focus.
Your relationships test you and define you, not only your relationships with employees and sub-contractors, but your relationships that you have with your employees’ families and customers/clients. You have to truly understand them and their needs in order to be able to deliver and gain their business. Remember, it is not about the quantity of clients, but the quality of your relationships. If you get only one more job a month, that alone would provide you with another level of success. Or better yet, one more job per month from each key client; what would that do for your business? You must understand what your role specifically is in your company and, if necessary, you have to change it. Our experience has proven that the biggest problem in many companies is that they are centered on the owner and potentially other family members connected to the business. This is in part due to the fact that many owners came up through the ranks swinging a hammer or sucking rugs, only later to become the owner of the company. In cases like this, it is understandable that they would not have been “groomed” for management.
I cannot reiterate enough how important having the right people in the right roles is, even if it means shifting current personnel (including you). None of the above is really possible until you have committed your goals, objectives, and high-payoff activities into a written format that meets the needs of your company. A business plan and marketing plan need to be constructed, and should include a time-sensitive action planning grid. If you become good at nothing else, as a key manager you must become good at reading, reacting to and understanding the numbers. This has to be done through understanding all the reports, and conducting key meetings in order to fulfill the requirements needed to continue or build your business.
In working with many clients, and dissecting the research and success we have conducted together, I have found there are four distinctive elements crucial to grow your business and maximize your profit. I refer to these four elements as the four cornerstones: management, operations, financial activities, and sales/estimating/marketing. It is not even debatable that management and leadership are critical components for any company. Subsequently, the question remains not whether you have a management team, but whether you have an effective and highly efficient management team that provides proper leadership. Every company needs to set aside the time to construct a deep analysis into all aspects of their restoration company, in order to clearly define what some would consider basic elements.
The key questions to explore may vary due to unique situations; however, every company or management team needs to first identify specifically what type of company they are. This does not include what you hope to be down the road, or what you have been previously, but specifically what you are now and what you must do to improve. The most efficient way to approach this analysis is to identify what area of your business is your competitive advantage over others in your marketplace. If you choose to focus on your biggest strength and financially advantageous markets, you can grow your business more effectively and minimize your liabilities. Attempting to build new markets as an additional moneymaker is never a good strategy if your company is not already in a financial position to do so. Minimize your losses and make a goal to expand your market diversity once you are in a financial position to complete a financial feasibility analysis for your current market and the specific needs of your clients.
As our industry continues to become a tougher business environment and your need to survive and thrive becomes more challenging, focus on your numbers and leadership. You will most likely have to make a number of tough decisions; if you can’t do it all on your own, don’t be too proud to ask for help. It’s not only your future, but the future of all those who rely on you and your restoration company, that hangs in the balance.