You cannot achieve profitability by focusing on it. Profits are the result of estimating jobs and controlling costs.
Variable costs are any costs incurred from designing, building and delivering to customers, materials, and labor. How well these are managed can determine gross margin or profit contribution. Estimate a job, then track the materials and labor used. The remainder of the customer’s check is gross margin or your contribution to profit. Field employees are variable costs and have a direct impact on profitability.
Fixed costs are all the other costs. Expenses like utilities, rent, payroll for support personnel, etc. These costs determine profitability.
For example, landscape maintenance contracts are usually low-margin jobs. Most landscaping companies have an average of around 35 percent. Once that money pays for fixed costs, it leaves about 10 percent for profit. If you are closer to 40 percent, your profit can reach 15 percent or better. The field has a major impact on this pot of money.
How do you want people to approach work? The job of field employees is to complete the job on or under budget. That requires every job to have some form of work order. It should contain a list of materials and labor hours assigned to the job. Unknown standards are impossible to meet.
The mindset of internal employees should focus on cost. Most small businesses are too small to have the measurements in place that provide the same information as a work order. That means a different approach. Since there is no budget per job, the focus for employees is to cut costs in their day-to-day role.
The following is an example of what can be implemented—make it fit your operation, but don’t deviate too far:
- Hold a training session and educate everyone on how they affect profitability.
- Rearrange your calendar and allocate two hours a week for meetings—no excuses.
- One hour is dedicated to field supervisors and the other hour to internal employees.
- Create or enhance work orders to include: first, a list of materials, the cost of the materials, a space for recording how much material is used and a space to record why it is off budget; and second, a list of employees working on the job, the estimated labor hours for the job, a space for how many labor hours are used and a space to record why it is off budget. Collect it at the end of the day.
- Once a week, meet with supervisors to discuss the work orders. There only two reasons you are over budget—a bad estimate or poor supervision. This is a discipline. Soon the supervisors are going to know what is expected of them, which is going to impact how they control work.
- Once a week, meet with internal employees to discuss cutting costs. Pick a theme for the month, electrical usage, for example, and challenge them to reduce it by 10 percent. Keep the theme until you achieve the 10 percent or what is possible. Then move on to the next major cost area. Never stop, you are creating a culture of frugality that increases profits.