Lori Stuckert

Do You Know What You Do Not Know?

By Tom Grandy, Founder of Grandy & Associates

Have you ever found yourself in a conversation with other contractors only to discover that you are totally clueless in terms of what they are talking about?  That is NOT an indication that you are ignorant in any way, it’s simply an area that you are unfamiliar with.  Bottom line, we often don’t know what we don’t know.

Having reflected on 35+ years of working with contractors I have discovered six general areas where many contactors simply don’t know what they don’t know.  For this article we are doing to take a bird’s eye view of those six areas.  If any are unfamiliar to you, I would urge you to research the topic a bit.  Why?  It will affect your overall profitability.

  • Labor Pricing needs to be calculated based on Cash Flow Dollars, NOT Accounting Dollars

There are huge differences between cash flow and accounting.  The bottom line is that cash flow deals with the real dollars that flow into and out of a company, while accounting tends to work with paper dollars.  One simple example are loan payments.  If the loan payment is $500/month and $100 is interest and $400 is principle only the $100 appears on the P/L Statement as an expense however, in reality, $500 actual cash flow dollars flowed out of the company.

  • Failure to build debt into your company’s Labor Rate is a formula for disaster

Since most trades companies start out with little to no cash debt it tends to accumulate rather quickly.  Debt can take many forms such as unpaid taxes, loans, lines of credit, not paying suppliers on time, or simply the $20,000 that was borrowed from Uncle Bill to start the company.  None of the dollars that flow out of the company in terms of debt repayment show up in the P/L Statement as an expense!  Again, from a cash flow standpoint those debt repayment dollars actually flowed out of the company but did not show up in the P/L as an expense.

However, when it comes to setting proper hourly rates, all dollars flowing out for debt repayment need to included in the company’s overhead so it is part of the hourly rate. 

Let’s assume the company made a profit of $8,000 for the month and debt repayment totaled $12,000 but was not included in the hourly rate.  That means, from a cash flow perspective, the company actually lost $4,000.  Wow!

  • Growth does not necessarily equal increased profit

The most misunderstood word within the trades industry is growth.  Why?  Most company owners see a direct relationship between growth and profitability.  If we do more work we make more money, right?  Maybe.  When the company grows so do expenses.  There are three points of growth that can literally put a company out of business.  First is when the owner moves from the field into the office.  The owner transitioned from being productive labor (bringing in money) to becoming an expense (salary).

The second point of growth is when gross sales reach $750,000 to $1,200,000 or roughly a million dollars a year.  This is the point where the company is being forced to make significant investments in order to “prepare” to move to the next level but doesn’t yet have the sales to support it yet. Bottom line, about 70% of all contractors that reach $1,000,0000 in gross sales for the first time lose money!

Lastly, growing more than roughly 15% per year will not cause gentle cash flow problems…it will create serious cash flow problems.

  • Departmentalization is critical (each department needs its own unique hourly rate)

Every department has different overhead, different labor hours, and different markup on parts and/or equipment.  That means each department MUST have its own unique hourly rate.  Ninety-five percent or more, of trades company do not break their company out by departments.  The result is predictable.  One department ends up subsidizing another department and no one knows it…until it is too late. 

  • All residential service needs to be priced based on Flat Rate Pricing

Flat rate pricing has two huge benefits.  First of all, the customer never sees you hourly rate or parts cost of markup.  They are only shown the final price before the work is done.

The second huge benefit is when a company’s hourly rate needs to be increased.  The rate is simply changed inside the system, new books are printed, or tablets updated, and no one even knows the price changed.

  • The fear factor of raising the company’s hourly rate is on the part company…NOT the customer

Today’s customer is looking for three things.  First, quality work.  Secondly, do what you said you were going to do, and thirdly do it when you said you were going to do it.  Translated, show up on time.  If these three things are routinely done, price won’t even be on the customers top ten list of considerations.

If any of the above six terms make you think, “Gee, I never thought about that!” then do a little research and explore the topic.

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The Right Questions to Ask When Negotiating a Deal

By Glen Herman, Creative Business Services

When it comes time to negotiate the terms of a business purchase, asking the right questions can help the deal progress more smoothly. You can always expect that there will be many negotiations between buyers and sellers. So, when issues come up, good negotiating skills are necessary. When you know the right questions to ask, you will help to keep the deal on track.

May I Have Professional Representation?

Trying to negotiate a business deal on your own is rife with pitfalls. There are seemingly endless details to consider. When deeply emotionally and financially invested, it is easy to overlook details accidentally. You may react to any snag in the transaction more sharply than necessary and create tension with the other party.

Having an M&A advisor at the negotiating table with your best interests at heart can make the process go much more smoothly. An M&A advisor not only has a more neutral perspective but also understands the complex factors involved because they have negotiated so many deals. They also understand both sides of any issues that might arise. As a result, they will already have a way to smooth over any differences to the satisfaction of both parties.

How Can We All Get on the Same Page?

For a business negotiation to progress smoothly, everyone must be on the same page. Otherwise, the deal is doomed to fail before it begins. A good M&A advisor will ensure everybody is clear about each other’s expectations and goals.

It is important to keep an open mind throughout the process and be willing to listen without jumping to any conclusions. A M&A advisor knows how to present ideas and offers in a way that will appeal to both parties and keep everybody talking amicably so the transaction can continue.

How About We Split the Difference?

There is usually at least one number that comes up that not everyone can agree on. Asking to split the difference shows you are flexible and eager to keep the deal progressing. This is a common negotiating tactic that can be under-utilized when tension builds.

This is a time when having an experienced M&A advisor who understands how to get everybody talking again can be tremendously beneficial. Your M&A advisor is protecting your interests but also understands the other party’s goals. When one side makes an offer to help bring everybody to the middle, this gesture of good faith goes a long way towards ensuring the deal gets done.

Experienced M&A advisor knows the right questions to ask and plans to smooth out any bumps in the negotiation process. Their involvement will ensure a more streamlined transaction because they have the experience and knowledge necessary to make sure the entire business sale process completes successfully to the satisfaction of everyone involved.

Glen Herman is Business Intermediary of Creative Business Services/CBS-Global in Green Bay, WI.  Call us to 920-432-1166. All your inquiries are strictly confidential. 

Check out the The Next Chapter Webinar Series with Glen and Bill Kinnard HERE.

Some Things Never Seem to Change

By Tom Grandy, Founder Grandy & Associates

Grandy & Associates has been teaching trades contractors how to set profitable hourly rates since its inception in 1987.  We are not alone.  Other companies have been teaching profitable labor pricing as well.  The irony is that after all that teaching the leading cause of business failure is STILL improper labor pricing.  Have some companies learned and moved on to profitable growth?  Of course they have. However, as an industry, we are no closer to overcoming this problem than we were 35+ years ago.

Many companies really have invested time, energy and money in setting proper and profitable hours rates…initially.  But many fail to adjust those rates as things change within the company.

Every change in your company cost of doing business will necessitate a change in your hourly rate in order to maintain profitability!

Grandy & Associates has multiple resources to help contractors set profitable hourly rates.  However, the objective of this article is not to teach the process of setting profitable hourly rates.  The objective of this article is to help the reader understand the need to adjust rates as time goes on.

To be able to illustrate the point we are going to need a simple Sample Company.  Let’s assume our Sample Company is 100% residential service and has three service technicians.  Each service tech bills out roughly half their time or 1,000 billable hours a year.  Let’s look at a few “What if’s”.

  • Techs are doing a great job and deserve a raise. The company desires to provide a $2.00/hour raise for each tech. 
  •  

Question: 

How will that affect what the customer is charged?

The additional basic cost to the company is $12,480/year ($2.00/hour x 2,080 paid hours a year per tech times 3 techs = $12,480).  When the $12,480 is divided by the 3,000 billed hours a year that means the company will need to increase its hourly rate to the customer by $4.16/hour ($12,480/3,000 billed hours = $4.16/hour) just to maintain current profitability.

  • One of the service techs van just died. The company needs to purchase another one right away. 
  •  

Question:

How will the new vehicle purchase affect the hourly rate?

Total cost with racks and wrapping the vehicle produced a loan payment of $550/month principal and interest.   That just added $6,600 in annual cost.  When the $6,600 is divided by the 3,000 billable hours the hourly rate will need to go up $2.20/hour.  That does not include the extra cost of insurance.

  • Good news! Health insurance for the three techs, owner and bookkeeper/CSR only went up $35/month each.
  •  

Question:

How much will the “additional” cost of insurance affect the company’s hourly rate?

Five employees at an additional cost of $35/month will result in an increase in the cost of doing business of $2,100 ($35/month x 12 months x 5 employees = $2,100).  Dividing the $2,100 by the 3,000 billed hours will cause the hourly rate to be increased by $.70/hour.

None of the three additional costs are huge by themselves but literally every additional dollar spent on the cost of doing business will DECREASE the company’s net profit by the same amount.  If the three items above were simply adsorbed, the company’s net profit will decrease by $ 21,180 ($12,480 + $6,600 + $2,100 = $21,180).  For a simple three tech service company that is a lot of lost profit!

Now, think about ignoring minor increase year-after-year.  You don’t need to be a brain scientist to see the long-term effects on the company’s profitability.

In honor of Grandy & Associates 35 years in business the founder, Tom Grandy, has written a book entitled Profitable Labor Pricing for the Trades Industry.  It covers why companies fail, differences in cash flow and accounting, how growth can put a company out of business plus detailed worksheets on how to set profitable hourly rates.  The $19.45 investment includes shipping.  Order Today!

Secret Enemies of Productivity

By Dave Ramsey, Ramsey Solutions

You probably feel there are rarely enough hours in a day, no matter how hard you work, to get things done. But being distracted doesn’t necessarily mean keeping up with friends online, or spending hours watching cat videos. There are other forces at work, many of them business related, that can secretly keep you from being productive.

Issue: Email

It’s all too easy to fall down a rabbit hole when you see dozens of emails sitting in your inbox. But are all of them worth your time and attention? Could some of them be handled by someone else?

Answer: Choose two times during the day to read and reply to email, and put those times on your calendar. If you have an assistant, put them in charge of your email and instruct them to forward only what you need to see.

Issue: Meetings

Getting together for updates, to communicate priorities and to develop new projects is a necessary part of doing business. But meetings can quickly get out of hand. 

Answer: Set a time limit and create an agenda for your meeting. Stick to both. If an issue isn’t resolved in the allotted time, assign someone to work on it and report back by a certain date. Then, move on to the next thing on your calendar.

Issue: Multi-tasking

The ability to multi-task is generally viewed as a valuable skill in the workplace. But the hard, cold truth is few of us do it well. Our brains just can’t handle five things at once for an extended period. In the long run, you end up stressed out, less focused and less productive.

Answer: Start every morning by writing down your goals for the day. Prioritize them and stick to your list, focusing on one task at a time. If you get distracted, take care of the issue, and go back to your list.

Issue: Socializing

I love hanging out with my team. They’re a great bunch of people. But socializing is one of those things that can quickly get out of hand if you’re not careful.

Answer: If you’re naturally talkative, block out a few minutes on your calendar each day to socialize, and stick to the time limit. If you don’t like to chat it up, schedule time specifically to interact and be sociable. After all, spending time with your team is an integral part of being a leader.

Respect your time, and you’ll be amazed by how much more you can accomplish—and how profitable that can be!

* Leadership and small business expert Dave Ramsey is CEO of Ramsey Solutions. He has authored numerous best-selling books, including EntreLeadership. The Ramsey Show is heard by 18 million listeners each week on more than 600 radio stations and multiple digital platforms.

Finding Your Purpose

By Gary Hazelberg, Grandy & Associates

Finding your purpose can be very important for you and for your company. 

Defining your purpose and communicating it will give your company focus and will help employees and your company achieve goals.

Simon Sinek explains it great in his book: “Start with the Why”

“Studies show that over 80 percent of Americans do not have their dream job. If more knew how to build organizations that inspire, we could live in a world in which that statistic was the reverse—a world in which over 80 percent of people loved their jobs. People who love going to work are more productive and more creative. They go home happier and have happier families. They treat their colleagues and clients and customers better. Inspired employees make for stronger companies and stronger economies.”

People will love their work if they understand why they are doing what they are doing, in other words what is the purpose of the company.

Do you need to add another statement to your company, you already have a mission statement…do you really need to write a purpose statement as well?  A mission statement and a purpose statement are different, both are important things to communicate to your company. 

A mission is what you do, while a purpose is why you do it.  Here are some examples of the difference between mission and purpose:

  • A mission is operating a business while a purpose is sharing a dream.
  • A mission is motivational while a purpose is aspirational, defining a true north.
  • A mission provides focus while a purpose fuels passion.
  • A mission builds a company a purpose builds a community.

A purpose statement is the Why you do things in HVAC, landscaping, pool maintenance or plumbing.  What you do is HVAC, landscaping, pool maintenance or plumbing, why you do it your purpose.  The purpose of your business may be to provide your customers with the best quality systems installed by the most experienced technicians or it may be to provide great jobs for your employees.  Think about why you originally went into business, what makes you unique or what gets you out of bed every morning.  What made you take that leap from employee to owner.   

  • What gets you up in the morning?
  • Why do people buy from you?
  • Are you providing a different product or service?
  • Do you have a different product audience?
  • Are you solving a particular pain point that no one else is solving or better than anyone else?
  • How do you enhance your customers lives?

Sit down with people you know and trust, inside and outside of your business, and have them help you define your purpose.  Once your purpose is defined it is important that you talk about it with your team.  Studies have shown that people are drawn to a company with a will defined purpose.  In this highly competitive hiring environment, it is important to define your purpose so your prospective hires will understand the type of company you are and why you do what you do.

A Purpose statement should be short and to the point so everyone can understand it easily. 

Have you ever seen a commercial on TV that doesn’t advertise the products they sell and wonder why did they spend all that money and not talk about their products?  They were probably talking about their purpose and they were advertising to get potential employees and customers to understand the purpose of their company. 

Reading some examples of purpose statements can help:

  • American Family Insurance
    • We’re dedicated to inspiring, protecting and restoring your dream.
  • Ford Motor Company
    • To drive human progress through freedom of movement.
  • CVS Pharmacies
    • Helping people on their path to better health.
  • Kellogg’s
    • Nourishing families so they can flourish and thrive.

Would reading these examples make you want to work for these companies over their competition? 

Clearly defining your purpose can really help during the hiring process.  First, the prospect will better understand the company they are looking at getting involved with. Second, the company with a defined purpose will have a great idea of whether this person will fit into the company and provide a contribution. 

Purpose statements can also help managers and other employees make some of the decisions that come up during a normal day.  Asking the question; does this decision I am going to make line up with the company’s stated purpose? 

It is a hard job to define your purpose, but it is worth it.  It is easy to get sidetracked on the pursuit of your purpose. So set a very specific defined agenda for getting your purpose defined and how you are going to communicate it. 

Once you have defined your purpose, talk it up, with your employees and make sure your customers are aware of it as well.  It will pay back financially, but also in happier employees and customers. 

Retirement is Closer Than You Think–Prepare Now!

By Tom Grandy, Founder

The key to saving is automatic withdrawal and time!  That’s right, a little saved consistently tends to mount up quickly.  Before we talk about retirement let’s review a few saving principles when it comes to your children’s education.  When my first grandson was born money was tight, as it often is when starting up a business.  However, my wife and I decided we wanted to begin putting at least some money aside each month towards his education.  After a bit of research, we discovered the 529 Education Accountants.  Money put in is taxed but all growth (like a Roth IRA, which we will discuss shortly) comes out tax free.  We only invested $25/month but that was 21 years ago.  Today that small amount of monthly savings has grown to nearly $10,000!

Looking back, one can’t help but think what the current amount would have been had we invested $50, $75 or $100/month.  As life would have it, we now have eleven grandchildren, so our monthly 529 investment has changed considerably.

Another example of money invested over time came from my mother.  When she died in 1991, she had saved roughly $2,000 for each of her five grandchildren.  We had three of the five grandchildren, all of which were very young at the time.  We placed each of their $2,000 into a mutual fund.  The original $2,000 grew into a significant down payment for each of them by the time they were ready to buy their first home.

Money invested over time grows!!!  This principle becomes significant when it comes to saving for retirement.  The key to making it work is automatic withdrawal.  There is not a business of any size that would be seriously hurt if $100/week were taken out of the weekly revenue.  Simply meet with your financial advisor and/or your banker and set it up.  If $100/week were saved that equals $5,200 a year.  Try doing the math on 5, 10 or twenty years…plus growth.  The number gets big, fast.

The best place to invest money for retirement is a Roth IRA.  Money going in is taxed as ordinary income, but the growth is tax free.  Below is a chart showing how much should be invested each year based on income.

Roth IRA graphic

Notice the limit for most people, again depending on income, is going to be $6,000/yr.  That equals $500/month.  Now let’s bring that back to reality by thinking about how it will affect the company’s hourly rate. 

Let’s assume the company has two service techs and one install crew.  The two service techs will bill out roughly 1,000 ++ hours per year, while each installer will bill out roughly 1,500 hours/year.  That makes a total of 5,000 billed hours for the year. If the $6,000 is divided by the 5,000 billed hours that equals $1.20/hour.  Keep in mind that the customer pays for everything, including your personal retirement!  If you want to create a significant retirement account raise your rate $1.20/hour (or do the math on your number of billed hours) and start the automatic withdrawal/investment program tomorrow.  When you retire, send me gift certificate to go out to dinner as a thank you.

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