Are you 100% certain that your electrical business isn't losing money right now or have you decided that 2016 is going to be your year for business growth but you're not sure where to start? Well the good news is that you can solve both these problems using the process we’ve mapped out below.
So to get serious about growing your business and/or to find out if your business is bleeding money you first need to understand how it’s performing. Once you know how you are doing you can devise a plan to do better. If you want to do better the first place to start is the cost line.
By starting with the cost line before you move through your plan you will have maximised the gross margin ratio so that any incremental revenue growth will generate a higher bottom line contribution giving you far greater bang for your buck.
So the three step process is as follows;
- Understand your costs
- Devise a plan (that includes cost reduction)
- Execute plan (starting with cost reduction)
Prepare or complete a profit and loss statement and a cash flow analysis. If you’ve been using Xero and a job tracking system like Tradify then this should be pretty easy. Otherwise sit down with your bookkeeper or Accountant. Any costs to complete this work will be recovered 10 times over so don't let that be an excuse. This process is going to show you that your key costs are related to suppliers, labour and overheads (surprise surprise).
For most electrical contractors your ability to get a market leading rate from key suppliers is relatively limited but the best way to look at supplier costs is to consider both the inputs and outputs.
For inputs you should compare supplier costs across a small selection of suppliers at least once a year. To do this effectively all you need to do is to create a small “basket” of key items and check with a selection of suppliers as to what this basket of goods would cost given a likely order volume (based on the last three months work). This will pretty quickly tell you whether or not you're getting the best rate available to you.
For outputs you just need to check your margins or markups. Make sure you are applying an appropriate markup to any and all materials used on a job. You also need to be sure you're accurately tracking all your time and materials via a job management system so you can recover those costs (but that's a story for another day). The easiest approach to markups is just to be super transparent and let all your customers know that you charge 10%-15% markup on all materials to cover credit, delivery, and warranty costs.
Obviously to lower labour costs you either lower your wage bill or you get more productive. The best place to start is labour productivity. You need to start comparing productivity and profitability by employee. Look at who is completing the most billable hours by job level and review margin per billable hour. This will quickly show you who is generating the most value and who is bleeding you. You can then take action. You’ll need a decent job management or job tracking system to do this.
The next place to start is productivity. Are you doing everything you can to ensure everyone can be a productive as possible. Are you ordering materials online in advance to save drive or down time? Are you scheduling and allocating jobs well ahead of time to avoid further downtime or errors on the job? Do you have productivity tools in place such as a job tracking system or tablets in each van.
Overheads is often the biggest opportunity percentage wise as it dramatically increases as sales drop. The obvious place to start with overheads is recurring costs. A tool like Xero makes it super easy to quickly spot these items.
The easiest ones to tackle are your insurance, phone, internet and mobile costs. It takes nothing more than a quick call to the competition to find out if your getting a good deal. When it comes to insurance, make sure you are adequately covered and don't just take the lowest rate. When it comes to telecommunications, before you make and decisions sure there aren't any hidden costs such as setup, installation or contract break fees.
Once you’ve reviewed those items just move down the list focusing on the biggest recurring overheads.
Another quick way to manage overheads down is to focus on ruthlessly managing and tracking your activities and making every job count. Paying close attention to non chargeable activities and expenses will quickly help stop you bleeding money.
Creating a Plan
Like most business owners you probably spend most of your time just making the wheels turn, booking jobs, finishing the job, invoicing customers and paying bills. Given this, don't bother with a 20 page work of art, just complete our super duper patent pending “One Page Performance Plan”.
The plan (whether you use our template or not) will force you to look at some of the key metrics in your business so you can start to make interventions designed to improve your performance. Do complete the plan you’ll need to know your cashflow, profit and loss, and sales performance for the last quarter. Sales performance includes things like the number of leads you dealt with, the number of quotes you won and lost and the number of existing customers you contacted.
Free Download: our super simple business plan template.
Executing the Plan
A plan is no good if you do nothing with it so now it's time to start executing the plan. By now you will have identified a number of cost items and sales activities that need closer attention over the next quarter.
Once you’ve completed your one page business plan it's time to print it out and stick it on the wall somewhere you will see it often. Even better, share it with the team, your advisors, or your wife and kids to make sure someone holds you to account.
If you follow the three step plan we’ve just outlined bleeding profits will be a distant memory! If you’ve found this useful sign up to our newsletter below to receive our blog updates.