We’ve all heard the phrase: “Knowledge is power.” In the business world, we gain knowledge, and therefore potential power, by learning new things through such activities as reading, researching, networking, coaching, training, taking continuing education courses and attending seminars/conferences. I say “potential power” because not everyone who has gained knowledge recognizes the power generated by that knowledge – or, they may not have leveraged the power to accomplish a particular objective.
You can also gain knowledge through the activity of planning. For example, sales designers in our industry conceptually plan a kitchen project to positively impact all the needs of their client. However, designers with advanced selling skills recognize the value of going to the next step: an early engagement with their client to collaboratively plan a budget for one possible design concept.
In doing this, they gain the knowledge of their client’s satisfaction with both the conceptual “plan” and the agreed-upon “price.” With those twin, quick approvals comes the power to ask for a signed retainer agreement and check. Marketing experts declare that this is the perfect moment to close the deal.
As prevalent as planning is in the daily lives of kitchen/bath sales designers, it’s almost non-existent among many design firm owners in our industry. Apparently, there isn’t enough time in the day for business planning or a high enough regard for the outcomes from this activity.
As proof, just ponder one key statistic from a recent SEN/KBDN Dealer Survey, which showed that fully 83% of kitchen/bath owners do not bother to prepare an annual budget for their business.
That’s the equivalent of a sales designer selling a $1,000,000 kitchen project without a detailed floor plan and estimate, yet expecting the end result to be not only a perfect fit, but also to achieve the company’s desired gross profit margin. Unfortunately, it’s just never going to happen!
Planning To Gain Knowledge & Power
If there’s one key discipline holding back the kitchen/bath industry from spectacular growth, it has to be the collective absence of business planning on the part of independent design firm owners. Frankly, our industry has probably failed in demanding this activity of owners because it has failed in furnishing the requisite business management training programs. Neither trade associations nor manufacturers have developed, or supported, a comprehensive, effective and industry-specific business school.
And dealer/owners have failed themselves, their employees and their families by not making the time – and the effort – to learn what they don’t know about running a successful business.
Business management seminars in this industry typically show weak attendance where design seminars are sold out. Owners and their personnel have pretty much settled for learning everything there is to know about good design and fashionable products – two arenas in which they are already expert.
A long time ago, a retired millionaire mentored me in the ways of becoming a successful businessperson. “Ken, you are a fine salesperson,” he said. “But you will never be wealthy until you become as fine a businessperson. And that starts with good planning, because it gives you the knowledge to make smart business decisions. Smart business decisions give you the power to grow your top and bottom lines. Wealth comes from earning a bigger bottom line each succeeding year. It’s as simple as that.”
Plan With The End In Mind
Long before Stephen R. Covey coined the phrase “begin with end in mind” in his popular self-help book The 7 Habits Of Highly Effective People, old Stanley Blanchard preached that philosophy to me way back in the early 1970s. Then he showed me how to apply it to my kitchen/bath firm in so many different ways. Here are just a few that have made a positive impact in scores of kitchen businesses in which I have had the privilege to coach their owners.
1. Cash Discounts. Most dealer/owners pay scant attention to 2% cash discounts, which quite a few cabinet manufacturers offer, or perhaps they don’t have enough money in their checking accounts to take advantage of them. However, financially savvy people like Stanley Blanchard always advise people to push the numbers out to the end to understand the true value of something like a cash discount. For example, with vendor payment terms of “2%, 10 days, net 30,” you need to project out what that 2% cash discount means within the context of an annualized return on investment (ROI). The algebraic equation is simple: 2% x 360 Business Days/Period of Investment (30-10 or 20 days) = 36% ROI. Think about that percentage for a moment. When was the last time that any investment of yours – a savings account, mutual fund, or a piece of real estate – ever came close to delivering that high of a return? It’s huge! Having gained such ROI knowledge, do you think it might give you the power, and the motivation, to seek an adequate credit line so you could take these cash discounts on a regular basis?
2. Annual Budget. The best way to realize your annual revenue and net profit goal is to plan for it as carefully as you would for a client’s kitchen project. Think of a company budget continued on Page 22Continued from Page 20
as the equivalent of a floor plan and kitchen remodeling estimate. The more detailed they all are, the greater the likelihood of a successful outcome.
So with budgeting, you must (1) conservatively project revenue (based upon the total of substantially completed projects), (2) estimate selling and administrative expenses in support of the revenue goal, (3) establish your desired net profit percentage, and (4) reverse engineer (adding items #2 and #3 together) to determine what gross profit percentage must be achieved at that level of revenue to earn enough dollars to “pay for” the overhead (item #2) and net profit (item #3).
By planning out the year to its end, you are now armed with the knowledge of what your company’s gross profit – in percentage and dollars – must be to make the net profit you want. And faced with a probable price increase, because you (and virtually every other kitchen dealer) have no doubt been under-valuing your projects for far too long, it gives you the power, the conviction and the motivation to make needed changes in your operation. For me, Stanley Blanchard’s budgeting process woke me up to (a) finding a faster way to get retained on projects and (b) increasing my gross profit margin from 35% to 51.5% so I could earn at least a 10% Pre-Tax Net Profit.
As a result, I started taking 10% out of every client check received – the net profit planned in the annual budget – and depositing the funds in our company savings account. And behold, at the end of the year, my income statement typically showed an overall 9-12% pre-tax net profit with the balance sheet listing investment accounts where those profits were parked and earning interest.
3. 12-Month Cash Flow Forecast. Let’s assume you would like to secure a $100,000 credit line to take advantage of all of those cash discounts that can generate 36% returns for you. How do accomplish that? Again, it comes down to concrete planning. The objective is to prove to a bank that you can afford to pay the principal and interest on the credit line for the year. And do it not with words, but the way bankers like it – with numbers on a spread sheet.
So, in this case, you need to push out a 12-month cash flow forecast based upon your annual budget. Take your annual revenue goal and break it down to how much will be sold, and how much will be produced, per month based upon historical percentages of each. Apply your typical payment terms to monthly sales for cash inflows. Subtract your monthly overhead for cash outflows. Assume how much of a credit line you may draw down each month and show the principal and interest as additional cash outflows, still leaving you with a positive balance in your corporate checking account.
It’s been my experience that payment terms of 50% upon signed agreement, 40% upon cabinet delivery, and the 10% balance upon substantial completion will, in most cases, show a very positive year-end cash spin-off for your company – even if you have break-even budget! Usually, that total is more than enough to pay off the $100,000 credit line. Putting a three-ring binder together that includes your budget, 12-month cash flow forecast, strategic plan and a few other sections has proven to make a very positive impression upon bankers to secure your business.
The End Is Everything
In summary, the ending is everything. Plan all the way to it, taking into account all the possible consequences, obstacles and twists of fortune that you may encounter. By planning to the end you will not be overwhelmed by circumstances, sidetracked from your strategic plan (which, by the way, is predicated on a written vision of your business when it’s all grown up), or forced to make decisions on the fly that might prove disastrous later on.
Planning to the end will deliver the knowledge to make smart business decisions and the power to implement them. Indeed, it’s the key reason why I recommend that kitchen/bath design firm owners develop not only an annual budget, but a three-year budget annually. This is time well spent because it gives owners much greater visibility and maneuverability to make adjustments in the face of changes and opportunities that may occur because they have thought further out.
How much time is needed for owners to prepare that three-year budget? If you set aside four days each fall – 32 hours – you can probably get this valuable planning job done. That’s about the same amount of time a typical sales designer needs to orchestrate the budgeting, planning, materials selecting, estimating, ordering and overseeing of just one $50,000 kitchen project so it fits like a glove. Surely, you can afford an equivalent amount of time to plan your $1,000,000 business to be a profitable, sustainable enterprise.
After all, if you had a choice, wouldn’t you rather guide fortune and help determine the future by thinking far ahead than waiting for things to happen to you?
Ken Peterson, CKD, LPBC, is president of the Chapel Hill, NC-based SEN Design Group. For more information on three-year budgeting spread sheets, 12-month cash flow forecasts, or an automated, industry-specific dealer management system for improved productivity and business visibility, please contact Ken Peterson, CKD, at 1-800-991-1711 or firstname.lastname@example.org. Peterson also welcomes comments, questions or concerns.