If you’ve slashed and burned, now is the time to start the New Year with the focus to build your business in a planned and structured way.
There have been many ways that ESCs have survived this difficult economic climate. The CEDIA 2011 Benchmarking Study revealed that the most profitable companies in 2010 stayed profitable by controlling overhead. While most of the companies in the study had similar gross margins, those companies that were profitable kept their overhead between 22 percent and 25 percent of total revenues. Those companies that were unprofitable had overhead that was more than 43 percent of total revenues.
Start the New Year off right by creating a budget for your overhead. As your volume increases, make sure that the total expected overhead dollars remain within your target percentage of revenue. Another way of looking at this is to determine the revenue you must bring in to pay for your targeted overhead.
For example, if you decide that your overhead budget is $85,000, you can use that number to determine your revenue target. If you typically achieve a 35 percent gross margin on your jobs, then you must sell at least $250,000 next year. The formula to determine this is: Overhead / Gross Margin ($85,000/35% = $242,857)
Beware that this is based on two factors; the first is that you can achieve a gross margin of 35 percent and second, that you are happy with little to no net profit. Instead, you can add your net profit goal to your overhead goal to determine your revenue target. For example, if you want to earn a net profit of $35,000 as well as spend your budgeted $85,000 for overhead, then you must sell almost $350,000 ($100,000 more than the example above.)
But again, this only works if you can consistently achieve a 35 percent margin on your jobs. As your margin falls, your revenue must increase to cover the same amount of costs. Let’s revisit the above example using a 30 percent margin. To cover $85,000 in overhead and earn a net profit of $35,000, you will now need to sell $400,000. ($85,000 + $35,000 = $120,000 / 30% = $400,000)
The key to these projections is to decide your budget for overhead, determine your achievable gross margin, and then do the math. Then, you can play the “what if” game—look at different overhead budgets, different achievable gross margins.
Set Your Marketing Budget Now!
While you are considering your overhead budget, it’s the time to consider your marketing budget. You may feel like you can’t spend money on marketing, but in fact, you can’t not spend money on marketing!
As you begin to add expenses, you should look for an investment that will provide the biggest bang for the buck. Marketing should be your first consideration. However, while effective marketing will increase revenue, ineffective marketing only increases costs. Therefore, you need to review your marketing plan and your procedure to track your marketing strategy. The shotgun approach to marketing is too expensive. CR
Next month, we start with creating labor utilization goals for 2012!
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.