Leverage internal data

January 6, 2016 -  By

If I had to grade the economy during the past three years, I’d probably rate it OK. Certainly not great, but compared to the years during the Great Recession, the past three were decent. I doubt we’ll get back to great for awhile—three to five years, anyway, or until the housing market receives a much-needed dose of adrenalin, which I don’t see happening anytime soon.

The sluggish economy notwithstanding, how is it many companies throughout the country have performed impressively (more than 10 percent growth) and so many others haven’t (less than 5 percent growth)? I’d categorize the answer as self-inflicted wounds.

I’ve had the pleasure of traveling our great country extensively and have seen numerous highly profitable companies despite the economy. I’ve also seen the lower performers—more than I would have liked to. Both have the passion and desire to perform well. Both have fine reputations in their communities. Both have exceptional employees who perform good work and have a strong moral and ethical fiber by which they operate. The difference between the two—other than cash flow and leaders—is information. Those who are taking advantage of the current market have dialed in their performance standards and score keeping to a T. The average performers work hard but rely on their gut to make the right decision, which is a high-risk/low-return proposition. The following are my top five differences between the highly profitable companies and low performers:

1. Sales and lead tracking. Otherwise known as a customer relationship management (CRM) program, this system tracks every lead that comes into your office. It manages complete customer data on the front end, tracks the contacts your people make with prospective customers and stores any proposal information and proposal statuses. The information is maintained in perpetuity until you wish to access it again. It’s a must for owners who want to build a library of current and future customers for mailings, email blasts and call-a-thons, and for those who want to create a series of metrics to measure and track the success of their sales programs.

2. Estimating systems. We all have estimating systems; however, here’s a litmus test for you: “If you were to send (independently) each of your salespeople to the same job to estimate and price it for an imaginary customer, would each of their prices be the same?” If not, you don’t have a system; you have a process in which each salesperson prices the job for what he believes will make the sale regardless of the profit. That’s a bad gamble. And you most likely don’t know how much profit you have on every job you sell.

3. Labor hour tracking by job. Once a proposal is signed and sent to production for service or installation, does the crew leader know and understand the scope of work and the hours needed to complete the task? If not, here’s what will happen: He’ll perform the tasks as he sees fit, not how you estimated and priced the job. How comfortable are you that he’ll make the profit you intended?

4. Chart of accounts. One of the most common faux pas I see is companies not knowing what their overhead is. So how can you price work if you don’t know how much overhead you must cover? Well, you can’t, and it’s likely your pricing will be based on what the market will bear. If you set up your accounting system correctly, you’ll be able to identify those costs you estimate specifically for the job (direct costs) and those you don’t (overhead costs). Here are two tests to see if you’re recording data correctly in your accounting system:

  • At the end of the year, assume your direct costs are the costs of one rather big job. Price it using your current processes. If there’s a difference between the selling price you just calculated and what you actually generated in revenue, you have a problem.
  • Are you making the percentage of net profit at the end of the year you think you’re applying to the jobs you sell? If not, you have a problem.

5. Rolling budget. Do you prepare a budget every year by profit center? If not, you need to. Is the budget flexible enough that you can update and revise it as you move through the year? If not, you’re not budgeting, you’re just guessing. A rolling budget is prepared annually by profit center and updated monthly with the actual data for the month and a fresh look forward about how the year will end. That’s the point, isn’t it? You want your budget updates to allow you and your crew as much time as possible to react if you don’t like what the numbers say. Now you have a management tool, not just a random guess.

Imagine if your company embraced the aforementioned information sources. Doing so would improve your bottom line most likely. If each one of these enabled you to add a point to your profits, an additional 5 percentage points in net profit probably would put you on the road to improvement. These applications are taught in texts, seminars, peer groups and on the Internet, so hitch up your britches, make a commitment and just do it.

Photo: iStock.com/dr911

Frank Ross is owner-manager of 3PG Consulting. Reach him at frank@3pgconsulting.com.

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  1. Looking forward to reading more