If it seems like you’ve been in survival mode for what feels like an eternity, now is the time to start the New Year with the focus to build your business in a planned and structured way. Last month we discussed controlling overhead and setting your marketing budget, read on for advice on creating labor utilization goals and digging yourself out of the cash-flow crunch.
Create Labor Utilization Goals
Labor utilization is the key to improved margins. Look at your labor utilization rate in 2011 and create a plan to increase it. Labor utilization is measured by taking the total number of billable hours divided by the total number of paid hours.
The higher the rate, the more productive your employees are. Increasing your labor utilization will increase profitability without increasing expenses.
Poll your employees to find out ways to increase their productivity. Ask them where they see wasted time. Ask them what you can do to make them more productive. Create a plan to help your crews be more efficient and do more work in less time. Find ways to cut out the wasted time from poor scheduling, lack of materials when needed, and the need for rework on jobs.
Increasing labor efficiency will increase your gross margin. And with an increased gross margin, you can afford more overhead expenses or improve profits.
Vow to Dig Out of Your Hole
If 2010 and/or 2011 were bad years for you, then you are probably starting this year in the hole. Your first goal would be to stop the vicious cycle of a cash-flow crunch and build up cash reserves. If you have used customer deposits for future work to finish today’s work, you’ve dug a deep hole. The only way out of this hole is to consistently be profitable and carefully watch cash flow. This is a long and slow road to recovery, but not an insurmountable task.
Keeping your margins up is the key to digging out of this hole. But to measure your margins, you must have a good, reliable job costing system. Whether you use an off-the-shelf accounting software package like QuickBooks or job cost using a spreadsheet, it doesn’t matter—as long as you do it. Decide that this is the year that you will track all your job costs and measure the margins of each job during each job, not just at the end of the job. And once jobs are complete, make sure that you do a post mortem—analyze each completed job to see where you hit the budget and where you were off budget.
Start the New Year Off Right
While you are at it, this is the perfect time to start your new year on the right financial track. If you need to make changes to your Chart of Accounts, the beginning of the year is the time to do it. Look at your financial statement for 2011 and see if they are telling you what you need to know. If not, now is the time to make changes. Make sure that all your job costs are grouped into the Cost of Goods Sold (COGS) section and all your overhead costs are in the Expense range. That way, you can use your Profit and Loss (P&L) statement to measure and track your gross margin as you move forward.
Leslie Shiner is a financial and management consultant. She is the owner of The ShinerGroup (www.shinergroup.com), a consulting firm helping businesses maximize profits and gain financial control. She is the author of “A Simple Guide to Turning a Profit as a Contractor,” available at www.MoneyMazeBooks.com. She recently received the Overall CEDIA Top 10 Instructor Award. Leslie can be reached at L_Shiner@ShinerGroup.com.