Operating a professional business

Peter Brueck

WHAT IS A PROFESSIONAL BUSINESS

•Profitable •Strong customer base •Happy staff •Safe work environment •Ethical •Systemised •Has review processes •Believes in training •Saleable

TURNOVER IS NOT PROFIT

Overheads

Refers to all ongoing business expenses not including or related to direct labour, direct materials or third-party expenses that are billed directly to customers. Overhead must be paid for on an ongoing basis, regardless of whether a company is doing a high or low volume of business. It is important not just for budgeting purposes, but for determining how much a company must charge for its products or services to make a profit.

Gross Profit

Gross margin is money left after subtracting the cost of the goods sold from the net sales and can be a dollar value (gross profit) or a percentage value.

Net sales are the total value of sales for a given period less any discounts given to customers and commissions paid to sales representatives.

Gross margin is not commonly used for service businesses as they usually don't have cost of goods.

TURNOVER IS NOT PROFIT

Formula

Gross Profit (dollar value) = Net Sales less Cost of Goods Sold Gross Margin (percentage value) = (Gross Profit dollars / Net Sales dollars) x 100

Gross Profit

Examples Gross Profit: $52,000 - $31,200 = $20,800 Gross margin: $20,800/$52,000 x 100 = 53.85% Using the example figures Joe's Irrigation Shop has a gross profit of $20,800. The business's overhead expenses must be less than this to earn a profit.

Once you have your gross margin you can calculate your net margin.

If your overheads are higher than the gross profit you are going backwards

Net Profit

Net Profit is your profit before you pay any tax (tax is not included because tax rates and tax liabilities vary from business to business). Net margin is your gross margin less your business overhead expenses .

TURNOVER IS NOT PROFIT

Net Profit Formula

Net Margin can be calculated as follows: Net Profit (dollar value) = Net Sales less total of both Cost of Goods Sold and Overhead Expenses Net Profit (dollar value) = Gross Profit less Overhead Expenses Net Margin (percentage Value) = (Net Profit dollars / Net Sales dollars) x 100 Example Net profit: $20,800 - $15,600 = $5,200 Net margin: $5,200/$52,000 x 100 = 10% If the net margin is 10 percent then for every dollar of goods sold you will make 10 cents in profit before tax after all the cost of goods and overhead expenses have been paid.

Using the example figures Joe's Irrigation Shop will earn 10 percent of $52, or $5.20, from every sprinkler sold.

TURNOVER IS NOT PROFIT

Markup

Markup is the amount of money above the cost of purchase or manufacture you sell your goods for. The price of goods sold needs to cover the cost of goods plus overhead expenses and allow for profit to be earned .

Creating a sale price

((Net cost x overhead margin) + net cost) x (profit margin) + ((Net cost x overhead margin) + net cost) Net cost = $100.00 Over head margin = 30 % Profit margin = 20% = (100*.3) = 30 = (100+30) x .2

=$156.00 So be careful when discounting Assume the list price of a sprinkler is $200.00

Then the maximum discount you can give is 22%

DON’T LET THIS STATEMENT BE TRUE FOR YOU HE WHO MAKES THE MOST MISTAKES WINS

UNDERSTANDING THE NATURE OF YOUR BUSINESS WHERE ARE THE COSTS DIRECT COSTS

•Materials /parts •Equipment hire •Labour/ subcontractors •Machinery and vehicles ( fuel/ consumables) •Replacement of hand tools •Site allowances •Special project requirements (e.g. routine inspections, project specific insurances)

CONSIDERATIONS IN CALCULATING CHARGE OUT RATES

How many chargeable hours you can work.

Typically you will have 2080 hours in a year (40hrsx52weeks). What you need to give consideration for are:

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Holidays 3 weeks.

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Statutory Holidays 2 weeks

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Sick 1 week

CONSIDERATIONS IN CALCULATING CHARGE OUT RATES

How many chargeable hours you can work.

So 52 weeks now becomes 46 weeks or 1840 hours for charging clients. 1840 hours seems reasonable but have you considered the Non chargeable activities such as:

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RDO •Rent/ Mortgage •Power, water and communications •Office equipment •Bank fees/ overdrafts •Insurances •Specialist services ( e.g. Accountants) •Licences and memberships fees •Advertising •Vehicle expenses repayments, rego , services •Machinery expenses •Full time staff wages and entitlements (e.g. long service) •Wet weather •Project time overruns •Warranty calls •Lost or damaged materials

OTHER ITEMS OF COST TO CONSIDER IN THE PRICE

How the little thinks add up

Cost per unit of a DBY Retail Discount Net cost $3.00

55% $1.35

How many do you need to sell to recover 1 lost joiner Using 30 Overheads and 20% profit Your sale price = ($1.35 x .3) = $1.75

Profit = $1.75 x .2 = 0.35

So just to break even $1.35 / .35 = 3.8 just to cover the cost and there is no profit yet.

I HAVE A RATE NOW WHAT?

You need to know if the rate is competitive. Just because you have a charge out rate does not mean that it will be profitable and win business. What does it mean if my rate is lower than the average?

 A lower than average rate offers opportunity to win business  Because you are lower does not mean it is better to stay low. Charging too little is as bad as charging too much as it may   undermine consumer confidence in you business. Is he a cowboy? Will the job be cheap and nasty or Are you a smarter and better?

Ask- are the costs low because I have not taken in something? Or is it because I run a very tight ship, smarter and control my costs?

What does it mean if my rate is too high?

 Am I being too unrealistic in my rates?

 Have I got control of by business costs?

   Am I comparing my price with a low baller and should I match him?

Does my work command a premium due to reputation?

Can I justify value add i.e. loyalty discount?

SELLING YOURSELF

Where do you start

•First impressions

What do you want to know from the customer

•What market do they fit; domestic, DIY , commercial •Where did they find out about you •Repeat customer •Recommendation •Web /advertising

Understand your Customer

DIY and domestic •Think about their cultural back ground •Their age •What knowledge do they have about irrigation

SELLING YOURSELF

What tools can we use

•Google Earth , Nearmaps •Manufactures websites •Irricad, Autocad, Webcaps, SpacePro •Examples of similar projects •Company promotional material

How do you present the quotation

•Generally you should respond with 5 working days •Always in written form •Send as an attachment in PDF format

What to include

•Company introduction and experience •Overview of the proposed system including nominated brands •Quantities of items (not a shopping list) •Price •List of conditions •Copy of the Code of conduct •References

SELLING YOURSELF

Follow up

•Ring to make sure the quotation was received •Make a time to call back to discuss the quotation

Installation phase

•Pre-start meeting with Client and installer •Regular inspections and contact with the Client •

Hand over checklist

•All sprinklers checked •Trenches backfilled correctly •Site is clean •Explain to the Client •The controller operation •How to shut the system off including location of isolation valves •Supply WAE plan •Client sign off

REVIEW

Project review

•Speak with installation crew •Compare project cost to quotation •Contact Client •Check they are happy if not why and what do you need to do to solve their issues •Ask for a reference

Filing System

•Site book; installation notes, photos, client meetings notes •Work as Executed drawing / sketch •Parts list