Many owners have been in business for years and have acquired a
veneer of success a professional-looking showroom, a newly leased
car and plenty of sales. Why is it, then, that many struggle to pay
their bills on time? Why is it that many owners show only a
marginal or even a negative net worth on their balance sheets? And
why is it that so many admit, in private, the need to earn more
income for the effort and risk involved?
Two key points
Whether you are an owner embarking on a new business or expanding your current operations, there are four key business decisions that will determine the extent of your return. Performing the "due diligence" in advance of making these critical decisions will greatly accelerate and maximize your return.
Decision #1: Commit to using Financial Statements for all decision making.
Too many owners of small businesses base important decisions on their current level of sales or the amount of money in their checking account. Bad mistake! Neither is proof that the company is profitable, nor that the company can afford another salesperson, display or truck.
There is no substitute for accuracy in Financial Statements. While owners don't physically need to input the data into their accounting software, they do need to know what is conceptually correct in this industry and instruct their bookkeeper (or accountant) accordingly. And, they do need to learn the fundamentals of understanding and using their monthly Financial Statement Reports to make sound business decisions.
Here are a few of the financial basics:
- Income should be recorded on the Profit and Loss Statement in
the month when a project is substantially completed, not when you
receive a check. The former is called the accrual method of
accounting, and the latter is the cash method. The cash method will
grossly overstate your firm's profitability because there won't be
any corresponding costs of sale posted against the initial deposit
checks. As a result, there is a substantial risk of making capital
equipment decisions or overpaying federal income taxes based upon
an inaccurate, inflated net profit.
- Customer Deposits should be recorded as a Current Liability on
your Balance Sheet. Following the accrual method of accounting, you
haven't earned this money until you have substantially completed
the project. Until you do, you must treat these checks as a
- Costs of Sale paid in advance of substantially completed jobs are recorded as a Current Asset on your Balance Sheet. This account is commonly termed "Works In Process." When the job is invoiced, these paid Costs of Sales are transferred to the Profit & Loss Statement at the same time that (a) the Customer Deposit Liability account is reduced by the deposit checks received and (b) the full amount of the job is recorded as "Income" on your Profit & Loss Statement.
Decision #2: Choose the right business model to match your goals
While there are hybrids of each, the two most successful business formats in this industry are the "Studio" and "Showroom" models. The "Studio" model leverages the owner's design and consulting strengths, positioning him or her to develop and sell all the projects. Support staff performs design assistance, office management and project management roles.
Subcontractors perform installation services.
The "Showroom" model builds on the owner's talent of recruiting, training and managing a team of sales designers (and sometimes payroll installers). There is a definite need for an operations manual complete with job descriptions, performance standards for each position and management systems to communicate the details of each project into the field.
Unfortunately, many owners move too quickly to the "Showroom"
model before they have the support positions in place, are ready to
effectively manage salespeople, have a well-written business plan
and have an operations manual for training and managing purposes.
The result often is organizational chaos, unhappy customers,
diminished profitability, serious morale issues and stressed-out
owners with aborted income growth.
Pricing & Marketing
Decision #3: Determine the correct price formula.
Contrary to the prevailing industry notion, you don't have to earn a 40 percent gross profit to be profitable. The proper price formula will be different for every operation and is a function of three things: (a) a "market rate" owner's salary, (b) the firm's overhead and (c) the firm's desired net profit.
Decision #4: Design a marketing system for your client's needs.
Marketing vehicles that will draw in qualified prospects for
more information are seminars, magazines, Web sites and
newsletters. Your showroom should be marketed as an "educational
center," complete with "storyboards," cabinet comparison displays,
resource libraries, product videos, etc. Involve your prospects in
the development of a design concept and budget so they are
empowered to make the right decisions for themselves. The unique
impact your firm has on the client's need for information will
determine the speed of their commitment and the opportunity for
higher gross profit margins. The best marketers in this business
employ these principles, are perceived as "great values" and
operate at 5-15% higher margins than their competition.