Best Of Blau-October 1996: Rebirth Of A Contractor
In last month's column I shared with you the 1990 profit & loss statement of a union service and repair PHC contractor who was headed for Chapter 7 bankruptcy. Remember, he delivered his services on a time and material basis with a labor rate of $65 an hour, which put him higher than the local competition by about $10 an hour. This poor guy lost big-time bucks of $41,213 that year on sales of $149,308.
I mentioned that in 1996 his company was recognized as one of the top 10 financial performers within Contractors 2000. Let's take a look at his company statement from Oct. 1, 1994, to Sept. 30, 1995, to analyze how things got turned around.
Sales grew from $149,308 in 1989-90 to $361,888 for 1994-95, an increase of roughly 142 percent or 28 percent per year. He adheres to my philosophy, "Success by the inch is a clinch, success by the yard is hard -- sometimes fatal." Subcontractor costs are subtracted from Total sales so he knows at all times what his own labor force is responsible for in terms of sales generation.
Total cost of sales ($116,625) is 33.7 percent of Total net sales, thereby producing a gross profit of $229,155 or 66.3 percent -- my kind of numbers! After deducting Overhead of $178,472 from his gross profit, this contractor had a Net profit of $48,320, or 14 percent of net sales. Not too shabby, especially when compared with his abysmal performance of 199Among the notable improvements is that we now find a percent column alongside dollar amounts, while Cost of sales is broken down into Material, Labor and Other, which was not the case with the 1990 statement. Though not itemized here, the "other" category included labor, travel, workers compensation, permits, equipment rental, union benefits, tools and supplies, and payroll taxes, all of which were broken down elsewhere.
Under Operating expenses (overhead), salaries of $76,840 covering the owner and his daughter is a great improvement over the slave wage mentality reported last month, when the two administrative employees only earned around $48,000.
Most exciting to me is the posting of Insurance and employee benefits of $12,792, which includes medical coverage, and a profit-sharing retirement plan in place for him and his daughter. At age 55, he still has some time to build retirement wealth, which is more than can be said for 90 percent of the contractors in our industry. Is it "greedy" to want what owners and employees in most other industries take for granted?
Also, this company spent $12,155 for Advertising in 1994-95, while in the past it spent barely a nickel. That's why, not so coincidentally, sales grew by 28 percent a year.
Credit cards now get accepted as payment, another positive move that's well worth the trivial expense amounting to 1 percent of sales. Dues and Subscriptions ($7,405) plus Training and Education ($3,316) pays for Contractors 2000 dues, Super Meetings and money-making seminars. Everyone's getting smarter. Also note how the owner now charges the corporation $4,800 for Rent and Taxes for the use of his real estate, which he didn't in the bad old days.
Numbers CrunchingAll of this represents a vast improvement in his operations compared with just a few short years ago. How did he make the transition? Simple -- he vowed never again to put his family's financial future in harm's way. He became a numbers cruncher, working on his business rather than working in his business.
In reality, this contractor made a career adjustment. He changed from being one of the world's best mechanics to becoming one of its best businessmen. He also got helped immensely by joining Contractors 2000, which increased his business and marketing acumen.
Nowadays he spends his time in the office rather than the field. He and his daughter make up the management team, and together they develop the information required to create proper selling prices. No longer are they influenced by the "normal and customary" rates of $50 and $60 per hour that exist in the market today. Hell, they damn near went under doing that.
I know what's going through your mind. You want to know what this company sold an hour of labor for during the 1994-95 fiscal year. Are you ready for this? During that period, consumers paid the fair rate of $134.44 per hour.
Many of you will ask, how is this possible? Simple. If you knew what you were really worth, and stopped depriving yourself and employees the medical coverage and retirement plan that most other people regard as entitlements, together with knowing what it costs you to operate per billable hour, you, too, could get started on the road to success.
$134 Per Hour ExplainedNow let's determine where that $134.44 of hourly labor emanated from. During the fiscal year covered here, the company generated 2,134 billable/productive hours of work. Dividing $178,472 worth of overhead by 2,134 produces a dollar-per-productive hour overhead cost of $83.63.
Add his direct labor cost of $37.37 (including fringes) to employee union labor in his market, brings the sum to $121 per hour. This is the break-even or static point for the commodity of labor. My dear friend then established a net profit goal of 10 percent on sales, which in turn produced a retail price for labor at $134.44 per hour.
I can hear all of you way back here in Milwaukee -- "Frank, there's no way we can charge those kind of prices. We'll lose all of our customers. You and the others are rip-off artists."
I have heard all these complaints thousands of times. It's because I know from my experience conducting seminars and in hundreds of hours of phone conversations with contractors that the majority don't have the slightest clue as to what it costs them to operate their business, and they consistently underestimate what they're worth.
It can be done. This P&L proves it.