Jerry and his price book
His gross margin had slid all the way down to 15 per cent, just like that. Except in business, there IS no "just like that."
May 4, 2018 by Steve Payne
As I write this, the world’s most famous guitar manufacturer, Gibson, is filing for bankruptcy.
And yesterday, I had a long talk with one of the most successful pro renovators in the country about his business woes. No, he’s not going to declare bankruptcy, but he just had to lend his firm a large sum of money. Money that he’d socked away for retirement and didn’t think he’d need to use to boost up his cash flow.
Gibson guitars got itself into trouble by diversifying too far away from its guitar business.
My friend (I’ll call him Jerry) got his business into trouble by losing track of his gross margin. Jerry’s problem was (and is) perfectionism. Contractors walk a fine line between production and perfection. Produce too fast and your quality slides; try to be too perfect and your gross margin crashes. Once enjoying a healthy 35 per cent gross margin, Jerry noticed that he’d slid all the way down to 15 per cent “just like that.”
It’s never “just like that,” of course, in business. In Jerry’s case, a number of errors compounded to put him in the position of working for free, once his overheads were factored in.
First of all, he decided to use his line of credit too liberally. Cushioned by this false sense of security, Jerry let his job costing run amok and didn’t notice that his subtrades had jacked their prices substantially, his guys were working way too slow and that he was doing change orders for free. And most embarrassing of all, he admitted that he hadn’t looked at his numbers in a detailed way in… two years. Oops.
Luckily, Jerry and his wife have the money to refloat his boat. The company is a good one, with a stellar reputation and loyal, repeat clients. But Jerry’s got religion. Of all of the changes that he is implementing, his Price Book is the one that he’s counting on the most. All of his subs will be asked to quote chapter and verse pricing for standard jobs for all work they do for Jerry – by the hour, board foot, square foot, by the piece, etc. There has to be a good reason to deviate from that pricing, and Jerry needs to know about it in advance.
Gibson guitars will likely rebound from Chapter 11; their brand is that good. Jerry will be fine, too. How about you? Do you need a Price Book?