Contractor’s Corner: Fine tune your forecast for 2023 - January 2023

By Dave Stafford

When planning for a successful year, there’s always the question, “Where am I going to get the sales volume and profits I need?” For most, there’s also a cold chill along the spine and a 3:00 a.m. panic, “What if I’m wrong? What am I going to do ensure our survival?” None of us have a crystal ball, but the best solution is to review what has worked for you in previous years and fine tune your business model.

The start of the new year is the time to review each tracked segment of your business, volume and profits, year by year, then quarterly and monthly. How consistent have your sales been, and are they growing or falling in each area? How about the profit? It wouldn’t hurt to plot this out on a simple graph-easy to do in Excel. In what quarter of the year do you show the most gross sales, deliveries and job completions? When are you going to need the most credit extensions or financing? What was the top month for service revenue and peak installation activity?

If a business segment is in a downturn, over what time period, and is it transitory or a sign of an overall change? No business area stays the same, but you may miss the signals if you don’t look longer term. The time to exit a segment is when profits are declining or require more effort and resources to maintain. Look carefully at accounts receivable-where are you spending the most time collecting money, and is this increasing or decreasing?

This happened to us in the property management segment, specifically rental units and their turnover rate. In spite of high-volume contracts, there was increasing pressure on us to deliver new requests to a completed job with a three- to four-day turnaround. This taxed our installation pool and required higher levels of stocking of materials, along with a lot of yelling and screaming with property managers: “I’ve got a move-in this Saturday!” What was worse, prices could not compensate for the handholding, and invariably, collection time was edging forward to 75+ days.

Do you have areas where competition has markedly increased over the last year or so? Perhaps you were the regional leader or pioneered a segment. Is that still the case, or are you having to bid more aggressively? What can you do to resurrect a valuable area-perhaps more targeting of ads or push for referrals? Or is it time to phase out of this area altogether and put your efforts elsewhere? Knowing when to “get out of the water” is critical, and this is especially true when current inflation is going to hammer a segment and curtail growth.

Nothing stings like losing a big annual/term contract that has accounted for a seven-figure volume. It happens. An upstart company is awarded a school contract or a regional term contract you held for years. What are you going to do about it?

Once, a commercial contractor won an annual contract for telephone call centers’ flooring in a growing regional area. More and more of the contractor’s resources were tied up in delivering these jobs. Profits were great, and bills were paid on time, until one day they weren’t, with almost no warning. The corporate “friend” was fired, and the orders vanished; jobs in progress were stopped; approval of current invoices was withheld. Mechanic’s liens were filed where possible, but there were still large write-offs. Not only was money lost on materials and labor expended, but this became a dead segment virtually overnight. Contractor personnel had to be reassigned.

Take a hard look at each segment and consider the following:
• Volume and profit
• Internal cost of personnel within a segment: salary, bonus, commissions or benefits
• Credit line usage or financial impact
• Accounts receivable/collection activity
• Infrastructure needs for warehousing, handling and deliveries
• Installation activity required

Score each on a one to five scale based on your overall company mix of all segments, varying the scale and adding to the list so that it makes sense for you. This is not meant to be scientific as much as a quick, visual guide for you. For example, I might rate accounts receivable/collection as follows: paid within 45 days=1, paid within 60 days=2, paid within 75 days=3, paid within 90 days=4, paid within 120 days+=5.

It is very important to rate sales personnel based on a consistent and defensible numeric scale, such as total compensation and fringes, divided by the net profit from sales produced by that person. Perhaps $135,000÷$420,000=33%. In this example, for each dollar of net profit, you’re paying out one third for compensation. For salary/commission personnel, I hope for no more than 25% to 28%.

Know what each person is costing you, and then look at the segment average, and finally, the overall company average. This is critical information when negotiating for compensation adjustments or replacing personnel. You may also use such information as a guide for what compensation you can pay new personnel; it may keep you from overpaying or underpaying. This will demonstrate their effect on profit dollars generated by a specific segment. An added bonus is that such records and notes may protect you from charges of hiring bias.

Use the segment and personnel evaluation to craft your 18-month plan. I’m sure you’ve spent time in the third and fourth quarters of 2022 thinking about what could have been done differently. Start with business niches: What makes sense to pursue or eliminate? How successful have you been within the healthcare or property management areas and local government or school systems? Do you aspire to regional, statewide or national contracts for certain products and installation? Perhaps you’ve established a rapport with several regional contractors as their go-to source for expert installation and project management. If you see some upcoming growth in the commercial arena, how might you leverage your referrals and expertise in project delivery?

After an August-September nightmare with three school contracts, we realized our company had ventured beyond its comfortable geographic delivery zone. Driving an hour to get to a location promoted problems from an evaluation, inspection and installation perspective. We chose to allow the lapse of this school contract. With another client, once a contract price was established, we could easily use a project coordinator rather than a salesperson/project manager to handle most job opportunities and field complaints. Our focus became several school and municipal contracts within a 15- to 25-minute drive from our location.

For client requests and service calls, we began looking at the PIA (pain-in-the-a**) index, coupled with volume and net profit within segments. We exited a state regional contract because we had to agree to a low to minimum threshold for sales. We could not compete with a flooring group that seemingly wandered throughout the state doing those jobs. Although in our immediate area, we declined to rebid a property retrofit contract with a high PIA, low overall profit, and a four to five on the accounts receivable index. We stopped pursuing Pentagon offices because of low per-order volume and a very high PIA level.

We were excited about a nearby healthcare facility and its branches. Existing sales personnel could handle this, and the profit potential was above average. Our bids were accepted for several projects and reviews of our work were terrific. After a candid conversation with the facility manager and purchasing agent, we helped them “craft” an annual contract bid specific to their needs and eliminated their having to compete on each job. This saved purchasing time and sped up the delivery and installation time from contractors. Fortunately, we were awarded a contract for all flooring and installation based on best price/best value that was renewed for several years.

Personnel changes are difficult, but this is where you need to answer crucial questions: Who is not performing? Where do you need extra people? What is the ramp-up time? What is the expected cost versus profit dollars? Can personnel be successfully transitioned to another niche?

As we began the exit from our residential builder/apartment retrofit area, a talented project manager was a good fit for our insurance claims projects segment. However, a marginally capable project coordinator was not, so we parted ways. Likewise with a project manager who lived for details but was unable to cope with volume and profit targets. While painful, you should make changes as your goals are modified. Upgrade those areas with better-trained personnel to enhance new or existing areas of potential. There are significant long-term savings possible.

When profit levels are stressed in a segment, is this a temporary thing, or has the business itself shifted? One usually profitable area for us became untenable because a new regional competitor entered the area and cut margins significantly. He was determined to make his mark and ramp up volume quickly. I frankly told one general contractor, “We just cannot operate at those prices. I hope you have payment and performance bonds on these jobs. We’re here if you need us.”

In another case, the municipal facility manager had included a contract provision that allowed him to make primary and alternate awards. That was good for him, and for us too, since we were not the low bidder. We did ultimately receive the alternate award. After the first couple of months, the primary contractor could not perform as agreed, and we made a nice profit doing the work that year at our prices.

If the business niche is viable, then step up advertising, sales calls and focus on referrals. You may stumble into a wonderful chance for profit. When following up on a particular referral, I was told, “I just got burned by Joe over at XXX! I have a rush project, with two more to follow. I don’t care about the color as much as a quick delivery and installation on the flooring.” He had been about ready to call a competitor but ended up being a good client for us. Most of his jobs were “rush,” but I made a nice profit, and he paid on time.

Frequently, replacing business is as simple as handwritten notes to clients you haven’t seen for several months. No one likes to be ignored. “Hey, Terry! I hope you have some projects coming up; I could really use the business. Meanwhile, I hope your year is off to a good start. Let me know when I can help.”

Despite the best plans on your part, sometimes competitors move in, budgets are cut, and projects are put on hold indefinitely. For that reason, monthly or quarterly updates on salesperson volume targets (and profits) should be done. This will force your sales team to let you know the bad news sooner rather than later and give you a chance to refocus their efforts. It is normal to trumpet the good news and bury the bad whenever possible. But it’s better to find a fix than scream and yell at a missed target. Most will welcome your input whether on salary, commission or some combination.

Unfortunately, businesses sometimes go bankrupt, or an entire niche comes to a screeching halt. This is one more reason to have multiple sales targets to offset such a calamity. Covid has had a monstrous effect on many. Always be looking for that next opportunity, whether it’s a service offering within an existing niche or another segment. While you may have to invest now, there is no better time to plan for the future.

Copyright 2023 Floor Focus 

Related Topics:Lumber Liquidators, The International Surface Event (TISE)