Know your company's finances inside and out
Every year, I like to focus on an annual theme for my quarterly columns. This year’s focus will be on how to make more money with four operational mind shifts. If you think you know everything, then move on to the next columnist you won’t listen to. This column is for only the serious business operators. Go ahead, turn the page… I’ll wait.
OK, now that they’re gone, let us learn a business fundamental that will make you boatloads of money.
I must warn you, your mind will be challenged, and I encourage you to be open and stop thinking you know everything there is to know about your business. Only then will the mind be ready to listen, absorb, and learn. The following concept I’ve coined as “revenue management.” Said differently, it’s a component of sales management, only dialed in tighter to focus on the profit portion of the sales revenue. You are about to break the glass ceiling of your belief that you should only sell when jobs are profitable. Have I got your attention?
The most important number in your business is your break-even number. You’ve heard me say this hundreds of times before. Frank Blau Jr. beat this into my thick skull 27 years ago, at the know-it-all age of 32: Understanding your break-even is the most important thing you can do in your business. If you don’t know your break-even, you don’t have a chance in this industry. Accompanying this article, you will find two charts that will help you visualize the importance of your break-even.
In this example:
Two fictional companies, Company A and Company B, both have a sales opportunity on each of the five days (Monday through Friday);
Daily overhead each day equals $1,000;
The average sale equals $5,000; and
The companies are looking for a 10% profit, $500 per sale.
One day with zero revenue can eat up to two days of profit due to one day’s worth of overhead cost. You’ll notice in the two examples on page 26 that Company A understands their break-even. Company B doesn’t have a clue. Each business is represented with the same amount of leads each day. How they perform on those five leads, one lead per day, will make or break a company.
On Monday, Company A is given a lead, and they sell a job at $5,000. They make their 10% profit, and you can see they’ve made $500. The horizontal dotted line represents break-even.
Tuesday rolls around and they’re presenting a job to a customer who pushes back on the price. The customer says “I’m getting a bid for less money — I’m going to have somebody else do this work.” Company A understands the break-even, and they communicate to the customer, “We don’t want to lose you as a customer, if I can get my manager to do that job for $500 less, can I earn your business?” The customer agrees, and Company A goes ahead, does the job and breaks even for the day. After two days, Company A has made $500.
Wednesday another sales lead comes in, and Company A sells it at full margins; they’re making their 10%, or $500.
Thursday rolls around, and the same thing happens as Tuesday. Company A is confronted with a competitive bid, and instead of walking away, Company A performs another job at break-even. At the end of Thursday, they are up $1,000 for the week.
On Friday, Company A ends the week on a high note, and they take a job at full 10% margin and end the week with a $1500 net profit.
Now, let’s take a look at what Company B does. Company B is a contractor confronted with the same amount of leads to run. On Monday, Company B sells a job at full margin, or $500 net profit.
However, on Tuesday, Company B is confronted with a customer who has a competitive bid. Company B chooses a different approach and mindset: They’re pretty staunch about their price and they tell the customer, “You know what, my price is the price, by God; if you’re not gonna pay my price, you can go pound sand.” So, Company B walks away with a zero-dollar day.
Understand what a zero-dollar day does to you: Each company is burdened with $1,000 a day of overhead. By not selling anything on Tuesday, the company has basically lost $1000, because they were not able to recover their overhead cost. Company B now ends up losing $500 after two days.
Moving on to Wednesday; Company B runs another call, and they sell it at the full margin. After the end of three days, this company is back to break-even. Company B has installed two successful jobs and walked away from one, and now Company B is sitting at break-even. However, in comparison to Company A, Company B is behind by $1,000 in net profit after just three days.
On Thursday, Company B is confronted with another competitive bid, below their selling price. Because they don’t understand revenue management or their break-even, they decide to walk from that job. Standing by the conviction that “the price is the price, and if you’re not gonna pay my price, then go pound sand.” After the fourth day, Company B is now down $1,000 for the week.
Come Friday, Company B ends the week on a high note with a sale, leaving them down only $500 for the week. That being said, Company B is slowing bleeding to death. They will die a slow painful death because they don’t understand their break-even.
I go back to Frank Blau’s teachings of 1990. Frank told me that “break-even is the most important number to understand in your business.” Today, that message is still true. I hope you take this to heart. You need to understand your break-even to survive in this business. I’m not saying you should give in to every price demand because your sales process is terrible; that’s a whole other topic.
In future articles, I’ll be discussing how you can fix your sales process, sell more jobs by showing value, and differentiate yourself from the competition.
Understand this: Your lack of business processes, your lack of big business knowledge, and your poor sales process will kill your business. The good news is, I will be touching on all these this year.
This article was originally titled “Breaking even” in the January 2017 print edition of Plumbing & Mechanical.