As part of the seminar, Butler offered eight additional steps to follow that would help remodelers become more professional about running their businesses. They include:
Pay Yourself First (and Enough)
Butler said owners should establish a salary for themselves and then make sure they pay themselves. “Don’t do for free what you would have to pay someone to do,” he said. “And don’t settle for what’s left over at the end of the week. We all know what that could be — zip.”
Speaking about his own experience when he had difficulty keeping his business afloat in the mid-1980s, Butler said he made a point to “cut a check for every owner, even while we were in debt. Some of those checks we could not cash, but we made sure we issued them.”
An owner’s salary was important for financial reasons, as well. “A bank does not care how much money your business makes,” he said. “A bank is interested in knowing that your business is at least successful enough to pay your salary.”
As for establishing a salary, Butler suggested that the owner should pay himself “no less than 10% more than the lead carpenter in your market."
Calculate True Overhead and Adjust Your Markup
Butler pointed out that a majority of businesses that go bankrupt have had record growth the year before. “Cash flow kills them,” he explained.
The problem, he said, is profitability. And the solution is to calculate true overhead and then adjust markup accordingly. “You can’t price properly if you don’t know your true costs,” Butler said.
He said business owners should calculate their true overhead — those indirect costs that the company would continue to have even if there were no jobs, usually everything except labor, subcontractors and materials. Once that is established, he said owners should aim to achieve profitability that includes 10% owner’s compensation and 10% net profit.
Butler provided several target formulas to calculate profitability:
Gross Profit
Gross Profit % = Overhead % + Slippage + Profit %
Assuming 25% overhead on $1 million in sales and 2% slippage, he said to target a gross profit of 37% to achieve a net profit of 10%. (25% overhead + 2% slippage +10% profit = 37% gross profit)
Markup Percentage
Butler said many business owners mistakenly believe gross profit and markup are the same. To calculate the correct markup, he offered the following formula:
1 / (1 – GP%)
So, for the $1 million in sales example above, the markup percentage is 59%
(1 / 1-.37) = 1 / .63 = 1.59 or 59% markup
Butler said remodelers should not worry about pricing themselves out of the market with that high a markup. Instead, he told the audience to work toward achieving that markup by starting at a lower rate and gradually building up to it.
Establish a Retirement Fund
Butler said remodelers should establish and fully fund a retirement fund because remodelers should have the same retirement expectations as an employee in a career position in any other company.
Obtain Disability Insurance
Butler said owners should obtain disability insurance and take care of themselves and their family because they are “hanging it all on the line. You’re at risk every day,” he reminded the audience.
He said disability insurance was readily available and generally inexpensive — especially for owners who weren’t on the job site every day.
Write a Business Plan to Achieve Your Goals
Butler said remodelers didn’t remodel homes without plans — and there was no reason to run their businesses without plans either.
When creating a business plan, he said owners should include their personal goals. If, for example, an owner wanted to climb Mount Everest, he said, the plan would have to include the time off needed to climb the mountain as well as the time off needed for training until the assault.
“Set your personal and business goals for one, three and five years,” he said, “and review and enforce it regularly.
“Don’t let your business dictate your lifestyle,” he added.
Job Cost and Review
Part of establishing a business plan requires accurate job costing and review. “Without job costing and review, there’s no point in a business plan,” Butler said.
The first step in job costing, Butler said, is to examine the types of projects performed — kitchens, bathrooms, basements, additions, etc. — and then determine which are the most profitable.
“Many of us build what we want to work on,” Butler said. That isn’t necessarily the most profitable. If that is the case, a company may have to work on enough of the more profitable jobs each year in order to allow the owner to do a sufficient number of those projects he enjoys doing.
Track Your Leads
Butler suggested that remodelers track leads so they can learn the sources of their most profitable customers and then concentrate there marketing efforts on those sources.
“Keep your lead tracking simple. Track the source, location, project value and final contract amount with change orders,” Butler said. “Begin to qualify your leads based on this data. Don’t waste time on less than perfect customers.”
He said that prior customers are probably a remodeler’s best lead source. “They have already been sold on your company, so stay in touch,” Butler said.
Join and Participate in a Trade Association
Butler said joining trade associations such as a local NAHB Remodelors™ Council, NAHB and business networking groups such as a Remodelor™ 20 Club provides remodelers networking, education and referral opportunities as well as resources and moral support. “It helps to know there are other people crazy enough to make a living this way,” Butler said.
The NAHB University of Housing Offers Designation Programs and Other Courses
The NAHB University of Housing offers CAPS, CGR, CGB and a variety of other professional designation programs and business management courses that set builders and remodelers apart from the competition. To learn more about NAHB’s designation programs, visit www.nahb.org/designations. For a complete list of all current education offerings, click here.
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