Selecting The Right Business Tools, Part 1
In the mechanical trades, we pride ourselves on our tools and proficiency with them. Having the right tool helps us get the job done better and faster. Having no tool may keep us from accomplishing the task but, more likely, will result in using the wrong tool, ending up with a botched job.
For an example of this, the next time you’re in a commercial building’s restroom, take a look at the chrome on the flush valves. An 18-inch pipe wrench can sure leave some nasty scars on chrome-plated brass. To solve the problem, we professionals will add another tool to the arsenal - even if it’s just the smooth-jawed version of water pump pliers.
What we’re not likely to do is to borrow that smooth-jaw wrench from a fellow professional. Pride will not let us admit that we don’t have the answer to every challenge. That’s why our gate mouth tool bag begins to look like Mary Poppins’ suitcase when we start pulling things out of it. (That’s also why we have a monthly appointment with the chiropractor!) We carry all those tools because we take great pride in being able to get the job done. We don’t think too much about how often we might need a tool before we get one, we just get it because the job needs to be completed today.
Our perspective on tools follows us as we launch our business. Once we put our own phone number on the side of a truck, we face a vast array of opportunities to acquire even more tools. Now we’re looking at copiers, computers and phone systems. Or we’re considering marketing tools to make the phone ring or dispatching tools to keep up with the jobs. But our “get-the-job-done” perspective on tools no longer applies. In business, like it or not, getting the job done has to take a back seat to the life or death fact that the business has to earn a profit.
When I bought the 2-inch pipe thread tap that’s sitting in the bottom of my 50-pound Kennedy tool box, I didn’t think much about the profit margin on the investment. I was interested in the instant gratification of repairing a 2-inch trap standard so I could re-install a mop sink. The cost of the tool was just a blip when compared to the delay that would be caused by ordering a new trap through the supply house, especially with all the hassles involved with getting the part into my hands. Even if the pipe tap gamble didn’t pay off this time, I’ll still have it available for some other opportunity.
The stakes are higher in the business world. The costs of business tools aren’t usually applied directly to a specific job. Instead, they end up in the overhead column where they continue to cost real money, either in lost profits or reduced capital. In the short term, a tool investment may get the job done, but in the long term its costs can continue to mount. And what if the tool doesn’t work as expected? Let’s look at a simple example.
The phone book ad sales rep walks in the door, armed with the knowledge that you have a “tools-get-the-job-done” mindset. The sales rep sets the stage for you: “Phone calls are the life blood of your business. More phone calls means more business.” The representative spells out the job requirement, then offers a tool to take care of it. By the end of the visit, you’ve booked a full page ad and you’re beginning to worry about whether or not you’ll have enough people hired by the time the book hits the streets.
Before committing to this tool, you first need to figure out if it will accomplish the primary job you need to get done. The phone book rep would disagree, but the primary job for this tool is not just to make the phone ring. Its job is to earn a profit. Let’s plug in some numbers to see what a profit means in terms of the cost of this tool.
Reality CheckBecause you know your costs of doing business, and you know what percentage of sales you want to dedicate to advertising, you have determined that your advertising budget as a small, growing company should be a hefty 15 percent of sales. The phone book rep has painted a glossy picture of how this tool really gets the job done as he or she has described and has quoted a monthly rate of only $2,000. What a great tool for the price, right?
Remember, the job your business needs to accomplish is to earn a profit, so let’s see what it will take for the phone book ad to help you get the job done. Will the picture painted by the sales rep pass a reality check?
Part one of our reality check: If the ad costs $2,000 per month, what gross sales will be necessary in order to achieve the profit goal? Step one is pretty simple; we calculate the gross selling price by dividing the ad cost ($2,000) by its budget percentage (15 percent), which means that the gross sales generated by this ad should be about $13,333. If this were to happen, you’d be very happy about your new tool. But is it realistic to think that this tool is going to perform as promised? Let’s dig a bit further.
First of all, what sort of impact would this result make on your business? If yours is a young upstart, a $13,000 boost in monthly sales could put you on the map. If it’s real, that is. How much is your average invoice? $500? $1,000? $300? Divide the required gross sales by your average invoice and see how many money calls you’ll have to generate in order to achieve this estimated target.
With a $500 average invoice, you’ll need over 26 average ticket jobs per month in order to make the numbers work. It would be nice if the phone book could do that for you, but don’t count on it. For a one- or two-truck shop, one new customer per day is like hitting a jackpot. But if this tool doesn’t perform as expected, you could be in a world of hurt in a short time. What if the phone book only delivers a dozen average ticket jobs per month? Suddenly, you’re spending a third of your average invoice just to pay for a single phone book ad.
Your business has to earn a profit. Obviously, earning a profit implies that you need to be doing some work, which means you need some phone calls. If your current sales, as a budding contractor, are $15,000 per month and your budget calls for 15 percent of sales to be dedicated to marketing, you’ll have a budget of $2,250 per month. Taking on a single expense of $2,000 per month virtually sucks your marketing budget dry. It becomes more of a desperate gamble than a tool because if the ad doesn’t pull in the calls you need, you’re left with a huge overhead burden that prevents you from accomplishing your profit goal.
Any other marketing you do will over-extend your marketing budget, further eroding profits until your phone book obligation is finally fulfilled, or you go down the tubes. The big phone book ad may be the right tool for some contractors, but it’s just too big for your size of business. Focus on using tools that are the right size for your business.
Next month, we’ll talk about picking the right dispatch tools.