Running a More Profitable Business

by Kacey Larsen
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In the continuing response to the issue of running a more profitable business, these three industry experts from Dave Yoho Associates, Fairfax, Virginia, respond to the most frequently asked questions.


Joe Talmon Dave Yoho Associates

 

Joe Talmon, senior account executive with Dave Yoho Associates, responds to the following:

Understanding the issue of cash flow, and how it relates to growing a business?

First, it should be obvious: More sales mean larger payrolls for those installing or servicing the products. If salespeople are in the mix, they are frequently given advances. All of which creates a need for additional capital.

Simple arithmetic (apply it to your own actual amounts): If you were doing $500,000 per month, that equals $6 million per year. To make this as simple as possible, let’s say your company earns 10 percent pretax net—that’s what’s left after all bills, operating expenses, etc., are paid. At this point, with basic math, from $6 million revenue your company is going to earn $600,000. (Not accounting for depreciation, amortization or special one-time charges.)

Next, estimate your turn time. If you’re selling/installing windows, roofing, siding, cabinet refacing, etc., from the time you get the order with approvals for credit, remeasure and order materials, etc., the average turn time for most of these products is five to six weeks from the day you get the order to when the job should be complete. Depending on the manner in which you buy materials or your method of payment, this may vary.

At this point, you have $6 million minus your net pretax profit of $600,000, leaving you $5,400,000 in expenditures you will need to make in order to run the business.

Next (remember your turn time is six weeks) we divide that into what we call a net working year (52 weeks minus less holidays, sick or lost days, etc.): 48 net working weeks. Now divide that by six, which is your turn time, and you come up with eight turns per year. (You are turning your operating capital over eight times.)

Remember, you ended up with expenses (capital output) of $5,400,000, and you come up with a figure of $675,000 working capital needed. Scary isn’t it? Remember this is rough mathematics.

What helps make this challenge workable is getting deposits (25 to 40 percent, subject to varying state laws) on every job—which is sometimes more difficult on jobs that are financed—and you may get progressive payments on many jobs as well. Your cash flow situation may call for interim operating capital loans. Now do your arithmetic. If it takes you more than 6 weeks for the turn, you will need more than that. If your turn is less than six weeks, you’ll need less.

In the published and recorded series, “How to Run a Profitable (or More Profitable) Business,” Dave explains this in greater detail and examines dozens of ways to increase operating capital.


Rick McIntire Dave Yoho Associates

 

Rick McIntire, an account executive with Dave Yoho Associates, responds to those who have difficulty internally when trying to establish prices that ensure profitability.

How to combat the internal resistance to needed price increases?

This is a frequently asked question. The word combat implies there are those in your company who fight price increases. This usually comes about for reasons no different than price resistance when you are selling in the home. The “value” hasn’t been established. The issues of your marketing costs (leads), equipment, depreciation, training, hospitalization insurance, rent, light, heat and all of the factors going into maintaining your company are only possible with profitable revenue (sales that convert to a profitable return when the contract is completed).

Balance the latter against the fact that most salespeople believe your company needs “better quality leads” and “lower prices.”

To be blunt, your people need better training to sell the value of the products you market. Price increases created by vendors should allow you ample time to advise your sales staff and have them close out anything that is “pending.” Improve the training you provide for your salespeople on selling value. Handle all price increases the same way. Have training meetings on price versus value. Remember this:

“There is seldom a cold, rational, dispassionate prospect who buys solely on “merit.” Most buyers are influenced by their perception of value and the belief that the product or service presented meets their needs better than any other option.”

Dave Yoho—from “The Total Offer Concept” printed/recorded, Dave Yoho Associates

Above all, don’t let price issues or negative opinions dominate your sales meetings. Teach your salespeople how to sell the value of what they are selling. Incidentally, a thorough inspection of the project, taking pictures of specific problems when appropriate and then using the information during your presentation helps immensely. Follow this with a presentation, which demonstrates the superiority of your product and installation methods. Get commitments and “value appreciation” statements prior to quoting a price.


Brian Smith Dave Yoho Associates

 

Brian Smith, a senior account executive with Dave Yoho Associates, responds to an ongoing issue on how the price is established in many companies with unwise and archaic methods.

Where do pricing formulas come from in most companies?

Unfortunately, these often come from someone else’s pricing method, such as previous employers, competitors or an oversimplified formula (very archaic) that relates to multiplying your cost of goods and services to establish a price. As an aftermath, salespeople are permitted discounts and other latitudes, including price negotiation, which enables them to give incentives or “drops.” The unintended consequence of these pricing methods, unless carefully structured, is usually less or no profit.

A price list should originate from known and current prices for both material and labor. Example: If you take the cost of one square of roofing and add to it the cost to install the one square of roofing, you now have the base cost to supply and install the one square of roofing. Obviously, issues such as tear off, underlayment, special flashings and trims also contribute to that one square cost. These can be priced independently or grouped in the per-square price. Caution: Do not use this formula to explain your pricing to your prospect. Don’t refer to or present by a per-square price.

Next, from your operating statement, examine what the actual costs are annually for your general and administrative costs (often called overhead), plus your selling and marketing costs. These are all percentages, and let’s assume that all three of these latter items total 50 percent.

Then, assume that you want to make a 10 percent pretax profit (50 percent plus 10 percent, now equals 60 percent). These represent all of the extraneous costs relative to producing a profitable sale.

Next, think of your selling price for one square of roofing as being the difference between the 60 percent example above and the cost of the labor and material at no more than 40 percent. The combination adds up to 100 percent, which equals your selling price.

Now, here’s the final step:

Remember, you have to be covering all of the expenses named above, plus that 10 percent net-profit you want to earn. If the actual cost to provide and install one square of roofing material is $150, divide that number by 0.40. This equals $375, which is the per square price for that roof [Remember, be sure to account for trim, vents, tear-offs and underlay either by per-foot or per-square-foot price], covering operating costs plus selling and marketing and that 10 percent pretax net profit.

However, note that there is no allowance in this price for incentives/discounts, and if you were to give a 10 percent discount on your selling price when it is quoted, you have wiped out your profit. If the discount/incentive represents something you offer regularly, it also has to be factored into your price.

I know this sounds complicated; however, it really isn’t. In fact, once you prepare your prices in this format, salespeople are required to sell at specified prices in order to receive the 10 percent commission they can earn if the job is sold at the right price.

The final word: These account executives all have 15 to 20 years of experience prior to joining Dave Yoho Associates. They visit with clients approximately 145 days per year. Their opinions and suggestions are based on this standardized pricing formula, which is excerpted from Dave Yoho’s recorded series, “How to Run a More Profitable Business.” For more information on Dave Yoho Associates, consult daveyoho.com. |QR

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