How to manage your contracting business using the 3 M’sCanadian Contractor Financials Business Loss Service
"Measure, Monitor and Manage." These are the 3 M's. They are incredibly useful in analyzing the key performance indicators of a professional renovation business.
By Ron Coleman
The best way to stay in control of your contracting business is by using the 3 M’s: Measure, Monitor, Manage. Or maybe we should call them the M&M&M’s because they really are a sweet way to make money! Let’s look at them in turn…
What to Measure
- Gross profit per your monthly profit and loss statement
- Gross profit on each job
- On service work, the hours paid compared to the hours billed to customers
- On retrofit and construction work, the hours allowed for the project compared to the actual hours
- Net profit
There are several reasons why the gross profit figure on your profit and loss statement might differ from your estimate. You may have overbilled or maybe some of your costs have not been processed.
Very often I find that elements of cost that were included in the estimate as direct cost are in your overhead. These would include WSIB/WCB premiums and employers’ portion of CPP, EI and benefits. Also a warranty provision was likely allowed in your estimate but not in your job costs. Gross profit on each job also suffers from the above.
What to Monitor
In order to have something accurate to monitor, I would recommend monitoring hours. The best way to monitor individual jobs is to monitor the actual labour hours compared to the estimated hours. Break down the job into phases so that labour and production can be measured in an accurate and timely manner. This should be done with each payroll, thus giving you good, timely and reliable data that you can monitor, measure and manage.
Service work should be monitored by comparing the hours billed to the hours paid for each worker with each payroll. You will likely find that some workers are far more productive than others. Use a GPS system either on smart phones or trucks to monitor both these numbers.
Monitoring your net profit is done by subtracting your overhead from your gross profit.
Set a budget so that you can monitor how your actual overhead numbers compare to your budget. Generally 50 per cent of overhead for a trade or specialty contractor is payroll related. So, if you are going to reduce overhead you are likely going to let staff go or put them into direct cost.
When you monitor the activities you will identify which activities are at an unacceptable level. Manage the activities, not the person. In other words, focus on the activity that is not getting you the outcomes you want. For example if the hours over run on a job, identify what activities may have created the overrun and seek advice from your team as to how this could be corrected or avoided in the future. Do your best to avoid personality clashes.
How to Manage
As a manager your role should be to look for problems and find solutions. Work on providing better support, mentoring and training for your team.
If your overhead is within budget and you are not making the desired profit then your gross profit is too low or your overhead is too high.
If your sales are below target then it will be very difficult to make your desired gross profit. You may have to reduce overhead to reach your net profit target. If your job costs are too high then your monitoring should help you pinpoint where the problem is and how to correct it.
What’s the ideal size for your company?
There is no ideal size; it is very much dependent on your structure. The way to answer this question is by asking the question, “If we added another work crew would we have to add any overhead apart from the cost of the work crew?”
If you don’t have to add overhead then aim for adding the work crew. If you do have to add overhead, better to raise your prices and do less work for more money. For every dollar in additional overhead you will need to generate approximately 8 to 12 times the cost in additional sales (depending on your mark up) or make significant savings within your existing infrastructure.
There are a host of other key performance indicators that you can apply the 3 M’s to. However, the key is not to do any of them yourself but to set up the process and delegate to other team members. For example, you might want to track quotations – the number you do and the conversion rate and then focus on how to improve the conversion rate. If you can go from converting 4 out of 10 to 5 out of 10 your sales will increase by 25 per cent with no additional effort.
There are a host of other performance indicators to which you can apply the 3 M’s. Don’t go overboard. Identify the key ones for your business and work on those. Start with one or two. Get some positive outcomes and move forward one indicator at a time.
Ron Coleman (www.ronaldcoleman.ca) is a Vancouver-based contractor consultant and public speaker.