In January 2004, I gave a New Year's list of things to do to improve your company during the year. I know some of you listened enough to begin using maintenance agreements. I'm hopeful that you found the other suggestions helpful as well. This January, rather than going over details, I want to focus on the big picture - our bottom line net profit. All of us, as contractors in this very risky business, need to be achieving higher profitability.
Discouraging Survey ResultsI was extremely disturbed when I saw the results of the Sheet Metal and Air Conditioning Contractors' National Association (SMACNA) Financial Survey for the year 2003.
This survey had typically been done annually, although 2002 was skipped. If we look at the average net operating profit for all contractors reporting for the years 1998, 1999, 2000, and 2001, the results were amazingly consistent, increasing each year at an average rate of 3.3 percent.
Yet for the year 2003, the average had dropped by more than half to 1.5 percent. In this report, the top 25 percent of the reporting contractors were split out, so that we can see how the "best of the best" are doing. Again, for the four years, 1998-2001, the top 25 percent each year consistently had net operating profits of 9.8 percent. However, in 2003 they too, had dropped over half to 4.8 percent.
Obviously, 2003 was a down year for our industry, but I am not so sure the 2004 results will be much better.
Remember that early in the year began the steel crisis and the numerous price increases that followed in steel and related items. Did you react quickly enough to cover yourself for these increases? In the latter part of the year, we saw the equipment manufacturers pass along significantly larger than normal increases as they attempted to cover their increased material and labor costs - especially the material increases.
Financial Planning Is KeyThe important point I want to make is to encourage you to make sure you are doing the proper financial planning to ensure that you are obtaining the profits you should be achieving.
Think of your business, no matter how small or large, as if you had to answer to outside shareholders. Could you justify the amount of your company's profit in order to encourage those outside shareholders to invest more in your company? If you can't, then you need to look carefully at your entire operation and make the necessary changes to achieve profit levels that would make you want to invest in your company.
Companies in far less risky industries than ours achieve significantly higher profit margins. The fact that we are an industry made up of relatively small entrepreneurs does not change the fact that we are entitled to a fair return on our investment.
While I do not know for sure whether the SMACNA survey is representative of the entire industry, my guess is that it's probably a pretty close representation. If that is the case, then we should be ashamed to have an average net operating profit of 1.5 percent.
I urge you, especially in these times when many of our costs are rising monthly, to make sure you are taking the necessary steps to ensure your continued profitability. And make sure that your profitability level is high enough to convince you that you are making a good investment in your business.
Guest columnist Butch Welsch operates Welsch Heating & Cooling in St. Louis. He can be reached by e-mail at Welsch1@primary.net.
Publication date: 01/31/2005