I spent a week in Maryland earlier this month. We boated around Washington, D.C., and Annapolis, plus I spent two and a half days leading a peer group retreat with nine contractors from around the country. It was a special time because everyone brought his or her spouse. One of the participating companies had built up a solid business over the past 25 years, and yet we discovered he only made $100,000 per year. The “sad” news is his wife, who also works in the business, took no salary at all. (It is not uncommon for a working spouse to be underpaid.) So, in effect, the owner is making approximately $60k and his wife is earning the other $40k. The shocker is, based on these numbers, his top employee earned $5,000 more than he does.

After assessing his business mix and financials it was clear to me he and his wife could be earning twice as much within the next 12 months. This also meant there was the chance to raise their income to $300,000 within the next two to three years. His company is what I call a “high gross, high overhead, low net company.” He has the gross profits; he simply needs to reorganize his business to retain more of the profits.

Here is my basic recipe for boosting company profit:

• Reduce the overhead—in dollars and percent of sales—and, if appropriate, find ways to shift overhead people into production;
• Increase the efficiency and productivity of production, both “on the job” and “day to day;”
• Raise the “as sold” margins; and
• Grow the volume, especially of the more profitable services, and reduce the less profitable services as appropriate.

Which of these four areas pose the biggest opportunity for you to increase the profitability of your business?

For this particular company we fashioned the following seven steps to double his income.

1. Analyze each service (and division) from a net profit point of view. Allocate equipment and overhead in order to understand which services make money and which don’t. Then identify if he should “fix, drop or grow” each service.
2. Reduce the complexity of the business by reducing the service mix. Don’t try to offer all services to all customers. Remove the obvious low-volume services that take too much overhead. For my client we decided this is irrigation and possibly one other service based on his analysis in the preceding step.
3. Reduce the low-margin, high-hassle business. For this owner we looked at eliminating the bid-build business, not only because of the margins but also because it takes too much of the owner’s precious time. Which of your service lines take up too much of the owner’s time?
4. Raise prices that were lowered in the recession and raise prices on work that is less price sensitive. Focus on your“green light clients” who love you and your level of work. Don’t try to sell every client who calls your company.
5. Shift goals and accountability of key managers from top line (sales) to bottom line (profits). Align the managers’ goals with that of the owners’.
6. Shift one or two overlapping positions out of overhead into production, closer to the action. This will decrease overhead and improve efficiency.
7. Create private time each day or week where the door is locked and the cell phone is shut off in order to work on the business. Free up one or two big chucks of time (two to four hours) each week, and 60-120 minutes of time on the other days.

The last step was the most important for this contractor, meaning get out of the weeds; clarify your role and refrain from doing other managers’ jobs; and stop reacting to low level problems that rightly should be handled by someone else. Most importantly, set aside time to work on the business, managing by the numbers. From there, it’s fairly smooth sailing to plan for profits and profitable growth.

Photo: Dietmar Lichota/flickr.com