Overcoming challenges related to money management in your business
By Mark Galey, CR, Magnet Construction Services Inc, NARI
While gathering up information for a marketing consultation I recalled the experience of having a GRIT magazine distribution route as a child, and a lightbulb came on in my head about how things then, shaped my habit patterns since. Besides cutting the neighbors yard, this was my first entrepreneurial venture.
I took the route at my parent’s request for me to get work. I wasn’t required to solicit for new customers; all I had to do was roll and band the papers, strap the bag over my handlebars, sling the paper and collect.
After each route, I rode my bike to the local bakery shop to settle with my boss. I would show him my paperwork on how much I collected, and he would calculate my pay. I don’t recall how much was collected, but I always bought a big apple fritter for myself as a reward for my hard work. This became a goal to look forward to the next time.
The worst part of the whole experience was collecting money from the customers. I disliked having to ask the customer what they owed. Oftentimes they weren’t home or they couldn’t afford to pay—in which case, I just didn’t get paid for the papers I delivered.
I felt intimidated and alone, as I never received any training from my boss on how to deal with different reactions from the customers. Regardless, I always tried to collect as this was expected by my boss, and I was satisfied with generating enough money to buy my apple fritter.
Though I really love what I do as a remodeler—and I believe I am good at itbut I have continued to struggle with the value of my services rendered, markups, justifying markup percentages, managing change orders, final billings and collecting.
As part of my lightbulb moment, I realized that my negative experience with the money side of my first business venture as an adolescent has affected my money mindset all my adult life.
I don’t feel sorry for myself, as I have made a decent self-employed living for almost 20 years, and I have made vast improvements during that time.
But I still recognize managing change orders as the biggest hurdle I have yet to overcome. My challenge comes in the big change orders, not the little ones. The ones you don’t want to stop the job to negotiate for, but when you add them up at the end of the job, they equal a lot of money. The ones that surprise the client when you hand them a bill well after the work has been done.
Some people might excuse it as slippage, but for me it is more conscious than that. I feel uncomfortable confronting the homeowner for what at the time seems like insignificant dollar changes, but are otherwise lost if I don’t.
I also have a fear of under pricing on the spot. Maybe I’ve never put a value on what it takes to implement a change order over and above the actual costs of the change. I attempted to overcome this by keeping change order forms available onsite, but for some reason I don’t execute them.
Though my contract has the force adjure clause in it, I know I have left a lot of money on the table over the years by having to backtrack and try to recreate the expenses including labor.
After I calculate this final billing, I kick myself for not having done what I should have done in the first place. Thinking about renegotiating after the fact sends me right back to my fear of collecting payments on my route.
A recent client went bankrupt between the time we finished the project and when the final bill was submitted. Needless to say I think that money is lost. By the time I’m doing the final billing, I am usually well into my next project, and it is pushed back another day because there is easier money to be had and a new boss to satisfy.
Once I finally get back with the client, I find myself having to apologize and provide reasons why it took so long and substantiate the billing. It makes me feel so apprehensive to have to collect the money in that scenario, when I know I should have handled it during the process. Many times I simply put it off because I had enough to get by on.
I have watched this burden my cash flow, and over the long-term I could have used this earned income to pay down loans, thus saving interest. Never mind the agony and time of recreating expense reports.
After 20 years, I am finally taking the first step toward acknowledging my weaknesses and finding solutions that will improve my processes. Had I addressed this earlier in my career I would have been more secure financially and emotionally.
But here is my double-edge sword. Habits are hard to change, especially in today’s competitive market. I feel like placing higher margins on my estimations or change orders will result in me losing out of projects. Yet lower margins make me vulnerable to losses.
I’m writing this to get it out in the open for me and hopefully it will help someone else as well. I know there are some in my industry who don’t have to deal with these issues, this is for the ones that do.
Mark Galey’s business challenges really hit home with Jesse Morado, CR, president of Renovation Coach Inc., in Atlanta. He faces similar challenges every day in his clients who hire him as their business coach. We asked Morado to share his expertise with NARI members who have struggled with the same issues.
Many of the problems experienced by contractors in our industry stem from a lack of a business plan that outlines how the business will operate, grow and remain on course. Because of the low threshold of entry in our industry, many come into it as technicians—meaning they have worked in the industry in some capacity as a carpenter, superintendent or designer for another company and believe they can go at it themselves.
Businesses are typically started with little to no capital and no business plan, which puts them at risk. Small business owners are forced to wear multiple hats as salespeople, designers, estimators, production managers, and administrators, working countless hours fighting just to keep up but never moving ahead. As a result, they never get around to writing a business plan that establishes policies and procedures, which keeps them in “no man’s land.”
Developing a plan that outlines the company’s purpose, mission, target market, competition, marketing strategy, sales goals, financial and accounting needs, pricing model, growth plan and exit strategy are essential to succeeding in today’s challenging environment. Here are a few solutions to the challenges faced by contractors.
Q: How should change orders be handled most profitably?
A: First one must know the margin they need to be operating at in order to price change orders properly. I recommend that the change order reflect all the costs associated with performing the task requested, including supervision, demolition, debris removal or labor costs. These hard costs should be totaled in addition to a fee for administrative costs associated with generating and managing the change order. Apply the respective markup to the subtotal and then add change order fee ($100 to $200 depending on the business).
Change orders should always include days added and be reflected on the schedule, adjusting the completion date of the project to manage the customer’s expectations. I prefer to outline how change orders will be handled and calculated in the construction agreement so this information is upfront for the client. Finally, business owners need to implement a policy on how change orders will be submitted, processed and collected to ensure cash flow.
Q: What can remodelers do when they have to handle change orders on the fly (i.e. subs are on the clock and the work needs to be taken care of immediately)?
A: In this scenario, a Smartphone is your best friend. The sub or contractor can take a picture of an issue as it arises, secure a price, write up the change order and text or e-mail it to the client for approval. This also tends increases the client response time, hardly affecting the flow of the project. Once approved by the owner, the contractor should formally write up the change order requesting a signature for his files.
Q: When setting profit margins, what is your recommendation to stay competitive, yet protect yourself from losses?
A: The gross profit margin on each project needs to be enough to cover the operating costs associated with the business and the amount of net profit the owner wishes to achieve to generate reserves and revenue for growth. Cutting your margins in an environment with lower volume can harm the business. Contractors should look at ways to manage the hard cost and timeline of the project to protect their margin, and in some cases, even increase margins.
Say I budget a project with a hard cost of $100,000 and sell it at 33% gross profit margin ($150,000), but I produce the project for $92,000. This savings goes directly into my bottom line increasing my profit margin. In addition, business owners should work hard to keep operating costs low. The combination of these two practices will keep the business competitive while generating revenue for continued marketing and diversification.
Q: What are your tips of managing jobs closely so the numbers are in line with your business model?
Systems, processes and procedures are key. Without these in place, it is difficult to manage your business and projects efficiently and profitably and still satisfy the client. A systemized company can measure whether they are winning or losing on the job and utilize processes that guide the team and client through production to bring projects in on time and budget.
Current technology has greatly improved an owner’s ability to manage clients and production. I encourage my clients to get systemized to manage client data, pricing, job cost, job performance and customer satisfaction.
All of the above solutions take an investment from the owner in order to achieve them. Nothing changes if you don’t initiate change.
Visit www.renovationcoach.com to acquire more business solutions from Jesse Morado, CR.