Seven Strategies for Increasing Your Profitability

A recent compilation of 30 kitchen dealers’ financial statements revealed the following averages:
income = $1,760,000
gross profit = 32%
overhead = 29%
net profit = 3% ($52,500)
owner’s return (salary + perks + net profit/company income) = 10%

These numbers don’t lie. The average kitchen dealer is neither making enough profit to reinvest in his operations and gain market share nor making enough compensation, in my judgment, for all the blood, sweat, tears and time he puts into the business.

Most dealers figure that if they just sold another $250,000, or $500,000 or $1,000,000, they would make their desired net profit, enjoy truly comfortable living and build a strong net worth. But, contrary to popular opinion, income growth marginally impacts net profit in the short term for several reasons.

First, more errors are made with higher sales volumes, so gross margins typically decline by a few percentage points. Second, variable expenses such as sales commissions and payroll taxes increase with higher sales volumes. And third, more staff people are usually needed to support the higher sales volumes, which adds to overall expenses.

Success Strategies
By “sharpening the saw” on basic business finances, kitchen and bath dealers can indeed make more profit in this industry. What follows are seven fundamental strategies to boost your bottom line. The more of these strategies your firm implements, the greater your profit will improve.

Strategy #1: Lower Cost of Materials. The largest cost item on any dealer’s financial statement is that of materials. On this particular compilation report, that number was 51%. Paradoxically, most dealers don’t channel any resources toward reducing this largest of expenses. However, there are a number of ways to decrease material costs. One of the best, in my opinion, is to join a buying group. Buying groups have been operating in the industry since mid-1994 and membership in one is the easiest ways for dealers – even relatively small dealers – to make immediate progress in reducing this expense.

Buying groups also allow members to earn rebates that drop directly to the bottom line, increasing profitability.

Strategy #2: Lower Cost of Labor. The third largest cost item on the dealer financial compilation report was labor – averaging 10% of overall corporate income. By using subcontract labor instead of payroll installers, a dealer will save on indirect costs such as payroll taxes, vacations, workman’s compensation insurance and health insurance. Furthermore, it has been proven that subcontractors can produce more volume in a year’s time than payroll installers because they have a monetary incentive to do so.

Some dealers fear the loss of control and slower customer service if they used subcontractors. But these just may be convenient excuses for a weakness in project scheduling and management – something that, in my experience as a business consultant, can be improved with a paradigm shift.

Gary Lazzaro of Webster, NY had positive results when he made such a change. “It was easier converting my payroll installers to subs than I thought, and I didn’t lose any control over my jobs,” he said.

Strategy #3: Increase Gross Profit Percentage. The vast majority of dealers are fearful that raising their prices will lose them business. But how is it, then, that one dealer in a marketplace can grow his business while operating at gross margins that are 8-10% higher than any of his competitors? The answer is that this dealer engages in more effective marketing that is built around the clients’ needs.

Dealers in this industry must come to realize that how they deliver their products and services determines their perceived value.