What type of contractor are you? Top line or bottom line?
Top line firms are usually in rapid growth mode. But bottom line is what it's all about, for most contractors.
By Mike Draper
Some companies strive to increase their top line revenue without too much worry about the bottom line. A company that thinks this way is typically in rapid-growth mode. On the flip side is the company focused primarily on profit without too much concern for revenue. This type of company is looking to make as much money as possible.
Lastly, there is the company that wants a balanced combination of growth and profit. It wants to grow, but wants to do it profitably. Which kind of company are you? Whichever company you are, let me make the case for being a profit-centered, bottom-line company.
Little changes made big bottom-line differences
Top line focus usually means big sales efforts and lots of time making sure your pipeline can handle the increased load. On the other hand, focusing on the bottom line can make life a lot easier. Consider this: If you currently have a 20 per cent gross margin and you increase your price by 10 per cent, you will make 50 per cent more gross profit. That’s right! A 50 per cent increase in gross profit from a 10 per cent increase in price. Remember that gross profit is revenue less job costs, before subtracting overhead expenses.
True, if you increase your price you might not win as much work. But since the work is at a higher profit margin, when you do win work, you will need less of it to make the same profit. Less work for the same money is a good thing. In the example above, you will make the same gross profit while doing 50 per cent less work. That’s a no brainer.
A bottom-line focus can also drive efficiencies into your business that will increase your profit more rapidly when the top line grows. Reducing your costs by just 10 per cent will have an equally big impact on your bottom line as raising prices. The truth is, you can always do a better job in buying product, running your projects more efficiently and reducing the labour portion of your work. After all, labour is the most expensive part of your operations.
The trouble with top-line focus
It often happens that contractors increase sales, but profits don’t change. They take on more work, but the increased volume creates inefficiencies in the business. More, not fewer, mistakes are made because the business owner is not on site as much, trades and employees take too long to do their work, and not enough time is spent on planning, etc. All of this translates into increased costs and less profit.
Here are two examples where savings can occur quickly here with a bottom-line focus:
- Running to the local building supply store many times a day is very inefficient. Plan the needs of the job well in advance and get more material on site at one time. Do your best to think ahead for what you will need, so that you have time to price out different suppliers and buy it from lower-cost sources. Buying materials at the last minute from the closest lumberyard usually costs more. You will spend less time running around picking up material and you will be buying at better pricing.
- Dealing too much with cash flow is an efficiency killer. When you spend five hours a week juggling cash flow (that’s low for many contractors!), you have five hours less selling time. Over the course of one year, that adds up to over 260 hours – or six weeks – of lost selling time. Imagine if you were able to sell for six extra weeks every year. Imagine the positive effect of that on your business!
The truth is, there is no reason for contractors to have cash flow problems. Make sure that you set up your milestone payments so that you get paid before you have to pay out. It’s that simple! Other options are to borrow money if you can or got to your suppliers and trades and negotiate better terms.
Bottom-line thinking is the way to go, but remember, making the changes bottom-line thinking demands will take time. Stick with it and, in due course, you will see the rewards.
Mike Draper is the president of the contractor coaching organization Renovantage. Reach Mike at firstname.lastname@example.org.