Making Sure You Make a Profit

by WOHe

We’ve recently enjoyed several years of unprecedented economic
growth and, for most of us, it has spilled over into our
businesses. While it has probably never been easier to sign up
projects, these “good times” bring their own set of challenges.

There are several forces at work that make profitability a
challenge, even in a booming economy. This month, we’ll look at
some of the significant ones, as well as ideas for dealing with
them. Areas of concern include the overtaxed supply channels, labor
markets and rising labor rates, retention of key employees and
retaining a long-term focus for your business.

Supply channels
As the economic expansion rolls on, several factors will conspire
to put pressure on our businesses. Over the last several years, the
distribution of product has changed as more and more manufacturers
have moved away from the vast network of local distributors, which
maintained deep inventories, to direct distribution to dealers and,
in some cases, to the consumer.’
Added to this is the pressure on the distributors that remain to
utilize all available technology to help them minimize their
inventories. In the past, this “pipeline” served as the shock
absorber for rapid changes in demand. Now, it doesn’t take much
acceleration in demand to pull most of the available product from
the pipeline and produce shortages and back orders.

Additional stress on the supply lines is being applied by the
proliferation of styles and finishes for all products which, in
turn, makes maintaining stock even more difficult. Add to this
consumers’ ability to gather information and customize products of
every kind and you have a situation where almost every item
specified could be a factory order. All of these factors make it
ever more difficult to keep projects moving and on schedule.

While we might long for the good old days when you could have
any finish you wanted on your faucet as long as it was chrome, or a
choice of either light or dark finish on your oak cabinets, the
reality is that what customers want from us is a personalized,
custom project where their tastes and needs are paramount. If we
are to operate successfully in this market, we’ll need to organize
our approach to projects to deal with the challenges that this type
of client presents.

The key to dealing with these new realities is to stay ahead of
the process. We need to get our clients to make selections as soon
as possible, hopefully by the time a contract is signed. Then we
must allow time between the signing of a contract and starting of
the project to get products ordered and on their way.’

It’s also a good idea to project product lead times in setting
our start dates so that projects don’t grind to a halt while we
wait for the parts we need. Additionally, we must keep track of
which suppliers and products have unreliable records for getting
product to us on time and steer our clients away from such
items.

Labor
With unemployment running at rates lower than most of us can
remember in our business careers, it’s becoming increasingly
difficult to find the people needed to perform the work we do. At a
time when we can sell more projects than our existing staff can
handle, just dealing with normal attrition would be difficult, but
trying to expand staff becomes truly daunting. With our competitors
and every other business attempting to lure our staff away, we’re
faced with a recipe for high turnover and an escalating wage
structure.

While Labor Department statistics tell us that inflation is
under control, the experience of our business may be quite
different. In many areas of the country, the minimum wage is
seemingly irrelevant to the local economy, as entry-level positions
now pay $7-$8 per hour and this, in turn, pushes up what we pay for
skilled help in our businesses.

Current conditions in the labor market not only drive our
overall labor cost up, they cause turnover, which drives down
productivity as new employees replace those with experience. The
end result is that our costs are likely to rise rather dramatically
over time.’

There are a number of steps that we can take to protect our
margins in this situation. The first of these is to make sure that
our procedures for pricing projects allow for rising costs so that
we don’t find ourselves completing work that was costed with
out-of-date wage rates. This can be accomplished by factoring in
the anticipated inflation between estimate date and the date we
expect the work to take place, or by performing work on a time and
materials basis.

The associated task of employee retention also becomes more
challenging in a tight labor market, with these markets making
companies more vulnerable to employee turnover. Frequently, our
staff will be exposed to subtle and not so subtle recruiting from
competitors, as well as any number of other businesses attempting
to attract qualified and talented people.’

The place to begin with employee retention is to not take staff
members for granted. Make sure that the organization has a sense of
team and belonging that allows each person to feel the freedom to
make a contribution and receive recognition when they do. We can’t
wait until we start to lose staff to alter our company culture or
address salary inequities; at that point, it’s too late.

Long-term focus
It is easy to lose sight of some of the basics when we’re faced
with the opportunities and challenges brought about by an economy
that seems to get better with each day’s news report. The basic
keys to a successful business remain the same: pay attention to the
clients, take care of the employees and watch cash flow.

It’s important not to lose sight of the long-term goals and
objectives of our businesses as we deal with an economy where it
seems like costs can be ignored and easily passed along to clients.
In the past, we’ve discussed the importance of having a mission
statement and using it as a compass for your business. Such a
compass can prove invaluable in times such as these.

Next Column: Develop a Middle Management

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