How to build wealth

Healthy, wealthy, wise. Photo: ©iStock.com/James Brey
Healthy, wealthy, wise. (Photo: ©iStock.com/James Brey)

LM1015-iStock-healthy-wealthy-wiseA wise old man once told me your definition of wealth will change as you accumulate it and grow older. In my work with large and small contracting firms, I’ve discovered four types of wealth that are measurements of success. You might place these in a different order, but I’m sure you’ll think of all four throughout your life:

  • personal earnings you can spend or invest as you see fit;
  • the value of your business;
stress-free discretionary time; and
personal and professional legacy.

The beauty of this list is that each one supports and creates synergy with the others. The following are 12 strategies you can undertake this winter to build wealth in all four areas.

1.  Your salary. Increase your weekly salary and build it into your overhead recovery calculation. Don’t just hope for enough profits to magically increase your income. Profits are often plowed back in to a growing business; therefore, make sure each job your company sells is paying for part of your income. Part of this increase will go through payroll, and part will be distributions.

2. Incentives. Develop incentives that will increase profits directly. Make sure your commissions, bonuses and feedback systems aren’t focused on small incremental improvements or strictly top-line growth. Instead, have them focus on having a large impact on your company’s overall profit performance.

This summer I spent three days with a company in Chicago that needed to pull together more as a team. One of the first things I did was throw out the firm’s convoluted, individualized commissions and incentive system. I told the five leaders they’d all be tied to the same net profit goal. Once I explained why, and how we would measure success, they straightened up in their seats. Within a few minutes, they started brainstorming about ways to make the company more efficient.

3. Budgets. Use a monthly budget so you don’t slow down after you finish sprinting through the mad spring rush. Many owners lose steam and/or focus after July 4. By using a monthly budget, you’ll be able to set month-by-month strategies to ensure you maintain momentum in the third and fourth quarters.

Remember, it’s best to build your budget backward. Start with the amount of profit you plan to earn, and then identify what sales volume, margins, overhead employees and overhead you can afford to hit your profit number. Budget annually by division—all the way to net profit—to ensure all your major services are priced and produced profitably.

4. Equipment. Optimize your equipment costs. Make a list of excess equipment you need to sell and broken down equipment that’s more cost effective to replace. Decide to rent equipment you don’t make a return on each year. Ensure the remaining equipment and any new purchases are being recovered through a conservative amount of hours being sold. Many contractors overinvest in equipment because of their ego or misguided accountants. To prevent this from happening, it’s important to track your return on fixed assets year over year. Track the past five years, and identify if they’re trending in the right direction. If it’s not providing you a good return, it’s eating away at your wealth.

Here’s a tip: Preventive maintenance and safety training will help you take better care of your people and equipment. Consider online training services. It will add to your bottom line.

5. Growth. Slow down your growth so you can optimize your profit. Your ego may want to grow at 25 percent, but your cash flow may only allow it to grow at 17 percent—and the high-value (high-profit) clients might tap out at 15 percent. Know the limits of these factors to increase your wealth. The highest-profit contractors I work with are very choosy about whom they sell to. They sell at high margins that ensure high profits, and they aren’t dismayed by a low closing ratio. What three changes would you need to make to raise your margins?

6. Hours. Be sure you can track your crews’ hours each day. Measure it, manage by it and provide feedback based on it. Nothing beats knowing your numbers by the day.

7. Owner’s role. To increase your business value and the amount of your discretionary time, you must increase the owner-independency of your business in:
sales and marketing systems;
production systems;
administration and finance;
client relations; and
people development systems.

Which of these are you still overseeing that you can train someone else to take over? Are you managing more than 10 percent of your client base? If you are, what steps can you take to wean your main clients off you as their primary point of contact?

One exercise you can do is identify what you’d have to do to go on vacation for three weeks or simply go on vacation at all (first start with one week, then two weeks, then three weeks). Afterward, do a post-mortem of what needs to be addressed to smooth out the bumps.

8. Recurring business. Another way to increase the value of your business is to increase the company’s percentage of recurring business (maintenance business and the amount of design/build work that comes from repeat clientele). Identify your percentage and determine if you can increase this percentage without drastically changing the company strategy and profitability.

9. Large client risk. You also can grow your value by minimizing the inherent risk of the business. Is one client responsible for 10 percent of your business? Are two clients responsible for 15 to 20 percent? Ensure you’re growing without overly depending on one or two large clients.

10. Superstar risk. Does your company depend on a single superstar who would cause havoc to the company if he left? If so, ensure this person is tied to the long-term success of the business, a noncompete agreement is in place and you have clear systems so a new person can step in and do the job if needed. Lastly, build your bench strength so you can deal with changes smoothly.

11. Equity risk. Another way to reduce risk is to ensure your company has sufficient positive equity on the balance sheet so it can withstand a bad year, an emergency or jump on an opportunity that would require the immediate use of funds.

12. Legacy. Developing your legacy is important to your business and personal life. Your legacy can be defined by what you’ve done to impact your family, community, employees and clients. Whatever your goal, be clear in writing what you want your legacy to be. Develop a legacy mission statement, hang it on your wall and intentionally work it into your business plans. Examples might be donating your landscape services to local community organizations, spending time on a community cause important to you or spending personal time with your family.

For instance, a good friend and client of mine, Shayne Newman, president of YardApes in New Milford, Conn., built his company so he can give back to his community. He’s developed a business that naturally builds his legacy, and his community has responded by supporting the company, protecting its reputation and referring good employees to it. He takes care of his community, and it takes care of him. It’s a wonderful symbiosis.

So what legacy do you want to achieve?

Featured Photo: ©iStock.com/James Brey

Jeffrey Scott

Jeffrey Scott

Jeffrey Scott, MBA, author, specializes in growth and profit maximization in the Green Industry. His expertise is rooted in personal success, growing his own company into a $10 million enterprise. Now, he facilitates the Leader’s Edge peer group for landscape business owners. To learn more visit GetTheLeadersEdge.com

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