The 3 million dollar road Part 1: The eight steps to growth
Most renovation companies gross under $1 million in annual sales. That’s small, but Mike Draper, consultant to renovation contractors, says it doesn’t have to be that way. In the next four issues of Canadian Contractor, Draper, vice president coaching at Renovantage Inc., will explain how his company helps contractors grow their business from startup status of less that $300,000 to the heady success of $3 million and more.
December 16, 2011 by Mike Draper
Renovation contractors with up to $300,000 in annual sales typically do a large portion, if not all, of the work themselves. This includes lead generation, demolition, material purchases, construction, final touches and collections. Although they may hire sub-trades for specific components such as electrical, plumbing, or drywall, most projects are completed alone. That means a rigorous work schedule and long hours.
Small renovation contractors have to manage the business as well and this is where they often come up short. They know that marketing, lead generation, and sales are vital to securing future clients, but because they are working long hours every day without the support of a backoffice administrative staff, they rarely have enough time or energy to give these components the attention they deserve.
The need to market
In order to grow a business, contractors need to be marketing and promoting their business and finding new renovation opportunities. When there aren’t enough hours in the day to do this, they end up working from job to job, with little to no job security. Not knowing where the next job is coming from causes unnecessary stress and anxiety, a burden that has the potential to affect both the contractor’s personal life and work performance. In the end, the added stress indirectly prevents the company from expanding.
Another characteristic of renovation contractors with up to $300,000 in annual sales is that they only tend to know if their business made money at the end of the year, particularly since they often don’t have a bookkeeper or invoicing system. It’s critical that small contractors understand where they are financially every month or at least every quarter. Producing an Income Statement and Balance Sheet on a regular basis is critical to ensuring the business is actually making money. Managing by the bank account is not the way to run a business. Understanding the importance of managing cash flow and being able to manage cash flow efficiently and effectively is another key component for the business owner. It’s also important to view each job individually, allowing contractors to foresee cash flow problems that can occur when taking on too many jobs or when a client falls behind on payments.
More often than not, small contractors do their own bookkeeping, and since they don’t have a lot of extra time on their hands, they tend not to focus on cash flow and profitability until it is too late. This can quickly lead to financial problems. As a bare minimum, the contractor must clearly map out the client payment schedule along with the timing and amounts of money needed at every stage of the project. It is only this way contractors can remain cash flow-positive throughout a project.
Another key financial area is pricing. The contractor must understand his overhead expenses and profit targets. You must make sure that jobs are priced to not only cover labour and material costs, but to cover overhead expenses, salaries and also generate a profit.
Wages vs profit
Many small renovation contractors don’t understand the difference between wages and profit. As a business owner, you deserve to earn a wage for the work that you do “in” the business. You also need to make a profit so that your business generates a Return On Investment (ROI) for the time and money that you have invested as the owner. When calculating overhead expenses, you need to pay yourself a competitive wage for all of the jobs that you do—marketing, sales, bookkeeping, site supervision, project management, sitework, etc. If you don’t pay yourself for all of these tasks that you perform, your business will never generate enough money for you to pay someone else to do the work. The net result is that your business will never grow beyond its current level.
Competing on price
A small renovation contractor does everything, but this isn’t the only characteristic holding them back from growth. Another downfall at this level is that renovation contractors compete on price. This focus on price means renovation contractors aren’t given an opportunity to showcase their value and workmanship, and therefore can’t use quality workmanship as a competitive advantage. It’s a scenario that greatly limits growth potential, as they rarely obtain opportunities to compete on higher-paying projects where their quality of work is a major decision criteria.
If they find it increasingly difficult to gain new customers, and if growth and profit are low, renovation contractors will quickly find themselves in a downward spiral. This is why it’s so important to work towards building the business. There are eight critical steps to building a successful business, and if one of those eight steps is missing, the business will not operate to its maximum potential.
The changes you will have to make are:
1. Develop a marketing program that provides a consistent flow of leads.
2. Develop and implement your “Unique Selling Proposition” that provides clear differentiation in your service offering so you don’t compete as much on price.
3. Systemize your estimating for accuracy and time savings.
4. Hire a lead carpenter who can run the day-to-day aspects of the job with little or no supervision. Hire a part-time bookkeeper to handle the administration.
5. Get off the tools as quickly as possible; You can’t grow while you are physically doing the work.
6. Systemize the sales process.
7. Start systemizing the production process so you don’t have to do it all yourself.
8. Invest at least one hour per week on your personal development and skills. Your business will only be as good as you knowledge and skills. Work on yourself as much as you work on your business.
To learn more about the steps required to grow your business to $3,000,000, please join Renovantage’s upcoming webinar. For details, visit www.renovantage.com/press.php
In the next issue, we’ll discuss the process of how a residential general contractor can move to $1 million in annual sales from operating at $300,000 annually. Topics will include: how to set up a cash flow system and put your business in a positive cash flow position; how to structure your milestone payments for larger jobs; how to acquire a reliable source of leads and referrals; how to move from a lead to a closed business; and how to understand the sales process. We’ll also cover how to hire a crew, such as a lead carpenter, bookkeeper, and sub-trades, and how to delegate work, providing more time to dedicate towards expanding the business. CC
Renovantage Inc. is a first-of-its-kind home renovation group of contractors specializing in everything from room renovations to complete additions. Renovantage takes the risk and worry out of home improvement by giving contractors the business tools, systems and services they need to operate efficiently and reach the next level of growth.