Anna Turner takes aim at tightening up business and management practices. Her tip? Set targets.
The only sure way to grow your business and ensure more profit is to set targets. Targets help focus on the things that will make a difference in driving up profit. They will stop you from guessing and steer you in the right direction.
In this article I want to focus on some of the most important targets and how to set them up.
The targets must start well before the job starts. Set targets that will win you the right work at the right margin.
Sales targets
You have to be in it to win it. But how much do you have to be in to win? Set monthly sales targets based on the amount of work you need to win to keep your pipeline strong. To do this you need to work backwards.
First, start tracking where your sales are coming from. Look for win rates by suburb, type of work, size of the job, client demographic, and client source. Stack the odds in your favour by prioritising the quotes you are more likely to win.
Track your sales conversion rate. Track what percentage of the jobs you quote, by number of quotes and overall contract value, versus the percentage you win. This will give you the volume of quoting you need to do each week to ensure you always have a strong pipeline.
It might take a year or two of data collection to know your conversion rate and where your sales typically come from, but it’s well worth keeping track of this data because it is the only sure-fire way to help you increase sales.
Profit targets
Who wants to take on all that risk for no reward? There’s no point pricing work that won’t make a profit, so you have to make sure the jobs you do price have the right profit margins built in.
You need to know your gross-profit and net-profit targets. The gross-profit margin is the profit before you have paid for overheads. The net profit is the money you have actually earned after all expenses have been taken out. To calculate net profit, deduct the company expenses (overheads) from the revenue.
You first need to calculate your overheads to set these margins. As an example, if you set yourself a gross-profit margin of 25% and net-profit margin is 10%, you are saying your overheads cost 15% of your revenue. To set a gross-profit margin of 25% you need to mark up your cost by 33.33%.
Now your profit margins are set, you are ready to quote jobs with those margins built in. Always calculate the gross-profit margin of each quote before you send it out. Do not send out a quote with a gross-profit margin lower than the one you set.
Gross-profit margin formula = gross profit (revenue – cost of sale) ÷ revenue x 100.
Cashflow targets
Cashflow is the single biggest killer of small businesses, so it’s vital you watch it like a hawk. A strong cashflow gives your business stability and vastly reduces stress levels.
Regular invoicing is key to a healthy cashflow. You need to ensure that each month you are sending out invoices to a greater value than the invoices you receive. Understand your monthly fixed expenses and plan for them. Forecast and track when the large expenses (eg: a stone order) are due. Work hard to invoice enough work to cover those outgoings. For example, putting more manpower on a project to get it completed to make an invoice deadline is a good way to help with cashflow.
Focus on reducing the time it takes to convert work into paid invoices. Invoice early and often. Try to negotiate short invoice-payment times – 14 days is good. Watch for builders who might try to give you 90-day payments. Set yourself targets for invoices being paid on time and chase those targets.
Build yourself a buffer so when you do get a shitty client, you can weather the storm.
The good news is that all the accounting software on the market today will automatically track your cashflow. Make sure you invoice and enter bills daily for the most accurate picture.
Team performance targets
It’s important to track how your workforce is performing.
On an individual basis you should set KPIs for each staff member. Align it with their career path and they will happily work to improve performance.
On a team and company level you need to track how well teams are performing against the expected outcomes set when quoting. Ideally the work should be done in approximately the amount of time that was calculated/allocated when quoting. If the two don’t line up, then the estimator is out with their pricing or the team is underperforming. Many factors, like weather and material delays, need to be taken into consideration (ideally these would be taken into consideration when pricing. However, in a tight market you can easily price yourself out of a job accounting for every bit of potential time wasting).
There is a vast difference between an efficient team and a disorganised one. They will both lay paving at the same rate; however, the efficient team will get the job done quicker because they are more organised and therefore will experience less delays. Tracking this efficiency is essential. You may have a team that’s not suited to one type of project but thrives on another. Tracking the outcomes of each project is the only way to actually see how the teams are performing.
Time well spent
It takes time and effort to track the data you need to set up and track targets, but it’s the only way you can gather the insights you need to make decisions around increasing profit in your business. Without them you are just guessing.
Start tracking today and implement the targets as soon as possible.