And he added, "One-third of companies go out of business because of poor cash flow, not low profits."
Successful business owners are those who understand the costs of each job before bidding on them and know what resources it will take to complete a profitable job. Part of that understanding is having a "profile of a successful job," Coleman noted.
He said that just because a contractor does well on one job and prices it right doesn't mean that every job will turn out the same. "Stop giving money back," Coleman said. "You can make money on one job and wind up giving it back on another.
"There is nothing you can do about bad competition and low prices. You set your own standards and stick to them. And you need to move your customers away from price."
COUNT ON EXISTING CUSTOMERS, NOT PROSPECTSColeman believes that a lot of contractors spin their wheels on marketing to prospective customers and don't spend enough time marketing to their existing customer base. He believes that current customers will remain loyal, spread word-of-mouth advertising, and not flinch when prices are raised.
He also said that contractors often choose the wrong time to go out and market their companies. "Don't wait until the market bottoms out," he said. "By then it will be too late and the margins will be very low. Start right now.
"And speaking of margins, 70 percent of contractors don't even make an 8 percent pretax profit."
Contractors shouldn't be afraid of losing customers, Coleman said. It may help their bottom line. "If you want to increase your gross margin, you usually do that by reducing your volume, i.e. fewer customers," he noted.
He used the example of a business with net sales of $100,000. "If you raise your prices by 2 percent this can result in a 67 percent increase in profit, because your direct costs and overhead remain the same," Coleman said. "But, if you increase your sales volume by 2 percent, you will be increasing your direct costs, too."
He said that if a contractor loses his or her "D" customers after raising their prices, they didn't need the customers anyway. "Bundle them up and send them off to your competition," he joked.
Coleman listed the only options for increasing profits:
He said there is one up-to-date way of knowing how well a business is doing: monitoring the monthly break even sales volume.
"Take your overhead and divide it by your gross profit and that will give you your break even point," he said.
CASH FLOW IS KINGColeman said it is imperative that contractors understand their cash flow cycle and don't try to go faster than the cycle will allow. "If your collections pass up your sales you are in trouble," he said. "In this case, your money is not doing anything for you. You don't want your money sitting in a bank. It has to be out there making more money for you."
He noted some key ways for improving cash flow:
Coleman added that contractors should look for jobs that involve more equipment costs than labor costs, although the opposite is usually true.
"In those cases, you may need to mark up your labor and not just your equipment," he said.
Publication date: 04/24/2006