Making Sure You Make a Profit

We've recently enjoyed several years of unprecedented economic growth and, for most of us, it has spilled over into our businesses. While it has probably never been easier to sign up projects, these "good times" bring their own set of challenges.

There are several forces at work that make profitability a challenge, even in a booming economy. This month, we'll look at some of the significant ones, as well as ideas for dealing with them. Areas of concern include the overtaxed supply channels, labor markets and rising labor rates, retention of key employees and retaining a long-term focus for your business.

Supply channels
As the economic expansion rolls on, several factors will conspire to put pressure on our businesses. Over the last several years, the distribution of product has changed as more and more manufacturers have moved away from the vast network of local distributors, which maintained deep inventories, to direct distribution to dealers and, in some cases, to the consumer.'
Added to this is the pressure on the distributors that remain to utilize all available technology to help them minimize their inventories. In the past, this "pipeline" served as the shock absorber for rapid changes in demand. Now, it doesn't take much acceleration in demand to pull most of the available product from the pipeline and produce shortages and back orders.

Additional stress on the supply lines is being applied by the proliferation of styles and finishes for all products which, in turn, makes maintaining stock even more difficult. Add to this consumers' ability to gather information and customize products of every kind and you have a situation where almost every item specified could be a factory order. All of these factors make it ever more difficult to keep projects moving and on schedule.

While we might long for the good old days when you could have any finish you wanted on your faucet as long as it was chrome, or a choice of either light or dark finish on your oak cabinets, the reality is that what customers want from us is a personalized, custom project where their tastes and needs are paramount. If we are to operate successfully in this market, we'll need to organize our approach to projects to deal with the challenges that this type of client presents.

The key to dealing with these new realities is to stay ahead of the process. We need to get our clients to make selections as soon as possible, hopefully by the time a contract is signed. Then we must allow time between the signing of a contract and starting of the project to get products ordered and on their way.'

It's also a good idea to project product lead times in setting our start dates so that projects don't grind to a halt while we wait for the parts we need. Additionally, we must keep track of which suppliers and products have unreliable records for getting product to us on time and steer our clients away from such items.

Labor
With unemployment running at rates lower than most of us can remember in our business careers, it's becoming increasingly difficult to find the people needed to perform the work we do. At a time when we can sell more projects than our existing staff can handle, just dealing with normal attrition would be difficult, but trying to expand staff becomes truly daunting. With our competitors and every other business attempting to lure our staff away, we're faced with a recipe for high turnover and an escalating wage structure.

While Labor Department statistics tell us that inflation is under control, the experience of our business may be quite different. In many areas of the country, the minimum wage is seemingly irrelevant to the local economy, as entry-level positions now pay $7-$8 per hour and this, in turn, pushes up what we pay for skilled help in our businesses.

Current conditions in the labor market not only drive our overall labor cost up, they cause turnover, which drives down productivity as new employees replace those with experience. The end result is that our costs are likely to rise rather dramatically over time.'

There are a number of steps that we can take to protect our margins in this situation. The first of these is to make sure that our procedures for pricing projects allow for rising costs so that we don't find ourselves completing work that was costed with out-of-date wage rates. This can be accomplished by factoring in the anticipated inflation between estimate date and the date we expect the work to take place, or by performing work on a time and materials basis.

The associated task of employee retention also becomes more challenging in a tight labor market, with these markets making companies more vulnerable to employee turnover. Frequently, our staff will be exposed to subtle and not so subtle recruiting from competitors, as well as any number of other businesses attempting to attract qualified and talented people.'

The place to begin with employee retention is to not take staff members for granted. Make sure that the organization has a sense of team and belonging that allows each person to feel the freedom to make a contribution and receive recognition when they do. We can't wait until we start to lose staff to alter our company culture or address salary inequities; at that point, it's too late.

Long-term focus
It is easy to lose sight of some of the basics when we're faced with the opportunities and challenges brought about by an economy that seems to get better with each day's news report. The basic keys to a successful business remain the same: pay attention to the clients, take care of the employees and watch cash flow.

It's important not to lose sight of the long-term goals and objectives of our businesses as we deal with an economy where it seems like costs can be ignored and easily passed along to clients. In the past, we've discussed the importance of having a mission statement and using it as a compass for your business. Such a compass can prove invaluable in times such as these.

Next Column: Develop a Middle Management

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