Using Business Systems, Part 1

Controlling costs through business systems is an important part of running a successful remodeling business. This month remodeling industry specialist Shawn McCadden, CR, CLC, CAPS, helps launch a three-part NARI recertification series on using business systems to control cost and grow profits.

McCadden says that profit should be a planned expense so therefore should be incorporated into the price of a remodeler’s product. It is not just a case of “wouldn’t it be nice if I had something left in the end.” It is also important that an owner should be paid for what they do before net profit is determined, because if the owner didn’t work there, they would have to hire someone to do what the owner does.

“You should calculate not only the net profit that you plan to have, but the net profit that you’re achieving,” adds McCadden. “If you imagine yourself as a stockholder, how long would you want to be a stockholder if the company came to you every year telling you it didn’t make money or needed more to stay in business? How long would a stockholder want to deal with that? Remodelers need to think that same way. They’re really stockholders in their own business.”

Controlling costs can be pointless if a remodeler doesn’t know what their reference point is according to McCadden. Whether it’s an estimate on a job project or a business’s budget, it’s important to have that estimate that flushes things out. If you’re going to apply a markup to the estimated cost in order to get to a sale price, then there has to be a budget that predicts the cost of being in business so a business owner can determine their markup.

“When we talk about controlling costs on the jobsite, we control them within our estimated costs so we can meet our margin,” adds McCadden “If you don’t have a budget, how do you make sure you’re spending your money in the right place? Control isn’t just over the hard numbers. Control is also questioning if you’re investing it in the correct places.”

McCadden recently had a budget for one of his clients in 2008 and the client did great. He made a great profit and kept his margins actually above where he needed them for his budget, but then, after the new year, he burned through the work that he had sold and the workload became very light.

“In his case what we were able to do was go back to his budget that he had done in 2008 and look at all of his overhead costs to see what he could do without and still keep his doors open, his business healthy and maintain his marketing,” says McCadden. “Because he used a system he was actually able to make a judgment on what things he could let go of without sacrificing some of the things that he’d accomplished. Things that if he let go now, would take two to three years to get back again.”

So McCadden’s client was able to figure out what his minimum overhead cost would be per month. Based on how much work he was actually able to sell, he knew what markup he needed just to meet his break-even minimum overhead expenses. Without having the experience of doing a budget and having the experience of watching that budget for a whole year’s time, there is no way he would have been equipped to make decisions on where to cut back correctly.

To stress his point, McCadden adds, “If you typically build bathroom projects, what would you do if you needed to build a bathroom for maybe less than the quote given to a homeowner? You would look at it and think about how it can still function and meet the homeowner’s wishes while getting the costs down so the homeowner can still afford it and you’re not losing money on it. You have to do it in a way that you’re not just lowering the cost and paying for the job yourself. Having systems in place helps remodelers figure out how can they cut the cost of being in business without compromising the purpose of being in business.”

In McCadden’s opinion he feels that most remodeling businesses are a bricolage; a construction made of whatever materials are at hand; something created from a variety of available things.

“A remodeler might have a contract and change orders because they know they need to have them, but maybe they are working together,” says McCadden. “Does the change order maybe conflict with what his contract says? So if a remodeler is going to run a bricolage, they have to know the pieces that they’ve assembled, in some way, make sense.”

McCadden feels that in order for the pieces to make sense it’s important to start right with the financial systems. He hasn’t seen many remodeling companies that can estimate their labor the same way they can job cost their labor. Companies don’t remember to estimate travel expenses, phone use, insurance benefits, workers’ compensation, liability insurance, and if they’re not, they should be.

“Most people out in the field don’t all cost the same,” explains McCadden. “If you just keep estimating everyone at 40 and one guy costs you 30, that guy probably costs you 30 because his production value is 3/4 that of the guy that costs you 40. Therefore that guy shouldn’t be able to get the job done in the same number of hours. He may take more time to get the job done, but may still be within the budgeted labor costs.”

Proceed to the test