Protecting Profits in a Softer Business Climate

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A notable number of kitchen/bath dealers report that leads are no longer as plentiful as in recent years. Consumer confidence has been trending downward since late spring, and economic experts are cautioning both the public and the business community about slower growth.

So what actions should kitchen/bath firms take to offset these economic realities?

Business advisers recommend immediate and decisive action in cutting overhead as the best response to weaker business conditions. Unfortunately, most small business owners in the kitchen/bath industry make two tactical errors. First, as sales-oriented optimists, most owners wait too long to cut overhead. It needs to be done in the month that year-to-date income figures turn negative compared to the previous year. Second, owners often cut marketing expenses before personnel costs. This approach may be much easier, but it will hurt the firm more in the long run.

Marketing represents the muscle in a firm's budget. It's the vehicle to promote your firm's uniqueness. Done well, consistent marketing will drive new business even in a down economy. Frankly, the vast majority of dealers rely too much on word-of-mouth advertising in good times, and invest only about 1.5%-2% of their annual income in marketing – only about half of what established firms should be doing.

During a softening economy, smart entrepreneurs will maintain or even increase their marketing budgets. As a result, they'll likely gain key market share and achieve a reasonable net profit if they are just as sharp in cutting overhead.

CUTTING PERSONNEL COSTS

As the second largest expense after material costs (51%), personnel expenses typically average 27% of a dealer's expenses (based upon a recent SEN Design Group survey) and, therefore, represent a much greater chance to cut overhead.

If all your sales designers are on straight commission, as they should be, then weeding out the weakest producer(s) will enable your stronger sales designers to close a higher percentage of the leads available. If desired, give the weakest producer(s) 60-90 days to get up to par on their annual sales plan, and then cut them if they don't make the grade. This strategy, combined with effective and consistent marketing, will maximize your top line income.

One large personnel area to target for substantial savings is payroll labor. For years, veteran dealers have been telling me how important payroll labor is to furnishing good customer service. They also claim they'll lose production control if they use subcontractors. But I know from personal experience that sound organizational skills and effective management systems deflate these two myths.

With payroll labor, there are a lot of "burden expenses" – such as overtime, sick pay, holidays, vacations, payroll taxes, health insurance, retirement, and truck and workman's compensation insurance. Indeed, these costs represent 42% of an installer's annual income on average (based upon a recent SEN Design Group compensation survey).

What's more difficult to quantify, however, is the lost production time when an installer has finished a job two hours early and ends up sweeping floors for the rest of the afternoon. Most owners grossly underestimate how much "dead time" there is for payroll installers in a year, and how much that cost is subtracting from their bottom line. In fact, it can be many thousands of dollars!

Converting payroll installers to subcontractors will make your operation far more efficient. And it doesn't have to be that difficult.

Sit down with each installer separately and explain that you are implementing a plan to streamline your production department while enabling them to earn a greater income. Basically, the plan calls for these installers to become self-employed while your firm remains their key account.

Here are some tips for conveying this strategy to them:

  • By being in business for themselves, they'll have an opportunity to enjoy a number of deductible expenses and perks that all small businesspeople enjoy.
  • They'll neither incur much marketing expense nor waste time hustling business, because your firm will keep them busy; however, they will need business cards and a listing in the phone book under home improvement contractors to prove their independence.
  • They'll not have to waste valuable production time picking up materials, scheduling jobs, making client calls and the like, because these functions will be done through your project manager.
  • They'll need to furnish certificates of insurance for general liability and workman's compensation insurance; individual tradesmen/business owners are not required to have the latter, but you must insist upon it. If a subcontractor is injured on your project and files a claim, it's likely to be validated and your insurance carrier will then raise your premium. The insurance expense will need to be factored into his pricing to you.

Prepare a standardized Unit Price Sheet for the subcontract installer to fill out – detailing so much money for each base, tall and wall cabinet (including unpacking, leveling, installing, mounting handles and adjusting doors), and for each filler, panel, appliance front, molding length, etc.

If they can't complete the Unit Price Sheet by himself, do it interactively. For example, if their labor rate is $30 per hour (which includes insurance, auto and small tool expense) and a base cabinet takes 3/4 of an hour to install, agree on $22.50 as the fixed cost for this operation. The hourly base labor rate should be less than what they charge consumers directly because you'll be giving them on-going business.

Where extensive remodeling is involved, they'll need to make an on-site visit at no charge to submit a fixed price for the project above the normal unit pricing for the kitchen installation.

All business will be transacted through purchase orders, and subs will need to submit invoices for payment (along with an installer's release signed by the client), making reference to the purchase order number. Payments will be made for completed jobs within 10 working days of submittal; extras, if any, must be listed with a separate price approved by the sales designer (whose pay is based upon the gross profit of the job) before being paid.

Any client requests for extra work in the house need to be passed along to your firm; the subcontractors must agree not to contract directly with your client for any extra work – like a new deck – unless you agree to it.

The benefits of this kind of a subcontractor business relationship are considerable. As the kitchen/bath design firm owner, your burden expenses will be dramatically reduced, improving cash flow and fattening your bottom line if you maintain the same mark-up over all job expenses. Just as important, your installation cost will be fixed so you won't experience the same labor overruns that diminished gross profit margins in the past.

I'm confident you'll also discover that these newly minted subs will produce more work in a shorter period of time because they now have a monetary incentive to do so. Indeed, it's been my experience that a good installer may double his gross income as a subcontractor.

In other words, everyone wins.

Read past columns on Bettering Your Bottom Line by Ken Peterson, and send us your comments on this article and others, by logging onto the Kitchen & Bath Design News Web site, at www.kitchenbathdesign.com.

Be sure to participate in the next KitchenBathDesign.com Online Poll, which asks how kitchen and bath designers and salespeople are paid, online now.

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