Do not be afraid to charge what’s fair. Deserve to make money on jobs. Pride yourself for being a shop and not a factory if that’s what you are. Just because you love what you do doesn’t mean you don’t also deserve to earn a fair profit doing it!
Sometimes not making a profit is your own undoing. Ye olde business, at least the way it’s currently functioning, may be what’s robbing you of a fair take. I was inspired to know more after reading a recent FinishIQ article, written by John Howell. In it he asks, “How profitable is the finishing process in your business?” He does a rather thorough job answering the question by laying out steps to isolate areas of your process (in this case, the finishing) for close examination.
Before you go to such pains though, maybe you should question your priorities first. There’s more than one way to police your business. What’s most important is to gain a perspective that you didn’t have before. Get the feedback you need that fits both your comfort level and your business model.
A. The Micro approach—divide and conquer
When product finishing is just one of your deliverables Howell suggests narrowly analyzing the process “separate from the rest of a job.” Determine if your finishing area is a profit center or an inconspicuous slow leak in the ship’s main hull. He warns though, “the profitability of finishing takes considerable effort to analyze accurately, especially if you do customized work.”
I would ask, does finishing comprise 5, 10, 25 percent, or more of your overall revenue. The answer will tell you how to prioritize such an exercise.
If all you do is finishing, or if it makes up more than say 10 percent of total revenue, consider also how similar or dissimilar your finishing orders tend to be. If you’re doing doors or other similar flat line work day in and day out, great. You’ll likely benefit from a micro perspective of profit margin isolated to your finishing process. However, if you deal with significant variables such as material, shape or scale; handle multiple cut-ins or other more complex finishing from one job to the next, I’d advise starting with a macro approach. It won’t replace the narrow analysis but it will broaden your perspective and hopefully lead you to improve profit margin.
B. The Macro approach—8 steps to improving your profit
1. First, plan to win—review your business plan every three months and make adjustments as needed to keep your strong vision in check with reality
2. Embrace the 80/20 rule—you’ve heard it before, eighty percent of your profit will likely come from just 20 percent of your customers. And, the opposite is true: 80 percent of your variable operational costs can likely be attributed to the 20 percent as well.
3. Know what productivity looks like—the line might be moving along smoothly but if defects are piling up on the end that’s not employee utilization … ‘nuff said.
4. Get out of the way for cash flow—cash is king, especially in trying times. If you’re unnecessarily adding to overhead, increasing inventories and not paying attention to receivables you’re constricting the blood flow of you business.
5. Partner more with suppliers—your trusted suppliers, are they worth their salt? Good ones like ACCESSA will work with you to determine how a simple spec change could possibly lower the cost or increase productivity. In short, there may be better ways to “buy” the stuff you need to do the job you want.
6. Be careful what you outsource—it can kill your profits. Adjust the way you engineer your product to match your business model. If you outsource pre-finished doors does it make sense for you to finish the boxes? Or, if you could turn a job in half the time by paying someone else to do some part of it, would you profit more in the end?
7. Improve personnel—note, I didn’t say replace them, that’s rarely the best move. Instead, take a measure of satisfaction, quality, productivity and loyalty once in a while. See if you’re both happy. Hiring? Go for decent guys, they do not have to be top caliber. If you’re good they’ll learn from you!
8. Invest in existing customers—cultivating new customers takes time and it’s expensive and risky. Your best bet might be to cultivate customers you already have in your back yard. Are you getting the most from them? And are they getting the most out of you? Everybody wants a profitable relationship.
Beyond the basics
If you have enough cash to meet financial needs; offer a service that a customer will come back for; tapped into a market with enough customers and; have the necessary legal structure in place for your company, the next step is make some money and grow. I think the best first step is to plan to win!
Profit is rarely inconspicuous to the small business owner. But when it becomes harder to find, there’s more than one way to adjust your perspective. Narrowly analyzing a single process of your business, separate from the rest, to determine profit margin, is hard to beat but difficult to pull off very frequently. By contrast, a bigger picture, macro perspective could become a healthy default for all aspects of your small shop if you practice.
I welcome your comments, questions or more discussion.