Blog posted by Michael Garrone & Josh Smith
In business, the word ‘Growth’ can mean many things. It may be growth in contract value, growth in volume, growth in margins or sometimes a mixture of all three. Whatever measure you are using growth should always lead to a better bottom line in the long term. If it doesn’t then your growth strategy is doing more harm than good.
In the first instalment of our growth series we saw these growth measures in action. Many businesses believe that the only way they can grow is by increasing turnover. What they don’t realise is that focusing too heavily on increasing turnover will not necessarily grow your bottom line. A drastic increase in turnover can come at the expense of solid margins, eroding some of the gains you have made from the increase in turnover. Secondly, the increased activity will often bring with it additional overhead costs such as administration staff or site supervisors. Both of these by-products of turnover growth will drive up your break-even point and squeeze your bottom line.
On the flip side, some businesses seek to grow their profit by focusing too much on margin growth. This can often lead to a loss of turnover as your product is perceived to be too expensive compared to your competition.
So how do you get the balance right as you look to grow your business?
Here are our top 5 tips for managing your margins to achieve balanced growth in your business:
- Know your place in the market
Who are you competing against? This should drive your pricing strategy. Are you a BMW business selling at a Holden price? Are you leaving money [margin] on the table by not pricing your product right? If you sell a premium product then customers are willing to pay a premium to buy your product. Conversely, if your business strategy is to focus on high volume entry level products then you need to seek savings in your costs as you will have more price pressure from your competitors.
[Update your prices and profit margins as the market changes]
- Have a clear growth strategy
Once you know your place in the market and the type of product you are selling you need to decide on how you are going to grow. Too often we see those in the building industry who don’t know whether they want to be a $5 million business with high margins or a $10 million volume business with lower margins. Decide on what you want your business to look like first, then decide on your strategy to achieve this goal. Each business and its overhead is unique. For some businesses this may be increasing turnover, for others it may simply be remaining at your turnover ‘sweet spot’ where you achieve good margins on a low overhead base. Whatever strategy you choose you should always be reviewing your margins to make sure you are pricing each job right.
[Focus on profit over turnover]
- Measure twice, cut once
It’s an old saying in the building game which applies equally to the estimating staff in the office as it does to the guys on the tools. The better you can estimate the job before you commit to it the more confidence you can have that you are going to achieve those margins. This is one of the most crucial areas of any business in the industry, as poor estimating can leave a long tail of poor jobs eating into your bottom line. If you need to make allowances for potential contingencies over the course of the job then they need to be considered and allowed for up-front.
Consider how you are pricing variations. They are called variations for a reason, so they should be priced accordingly. In practice this should mean that the average margin for a job should never decrease after a variation. In fact this should be an area to grow your margins.
[Talk to supplier and contractors about upcoming prices]
- Take a look back
The work doesn’t finish when the last tile is laid or last fence paling is nailed. Take a look back at each job to see where you were over or under budget and how this information can be used when estimating a similar job in the future. Did your margin grow or shrink from contract stage to site start to completion? This information is critical to identifying issues in your business which are eroding your margins. Make sure your accounting and IT systems can efficiently track and report this information to you.
Review your construction process to identify areas for improvement. Are inefficiencies in the process causing blowouts in direct or overhead costs? Are there quality control issues which result in additional rework costs.
[Are your reporting systems providing you with the information you need]
- Get ‘buy in’ from staff
As we saw in the first instalment of our growth series, your staff are one of the most important assets in your business. Having good staff in key areas is important, but getting ‘buy in’ from these employees is even more important. Too often we see staff where no one has provided sufficient clarity around margin requirements, let alone what that means to the business. Just as often feedback is too late if it occurs at all. After all, your estimators and sales force cannot operate in isolation from other departments. As the business owner you can’t do everything, you need quality motivated employees to back you up.
[Do your staff know what is required of them to protect your profit]
No matter what you growth strategy is these tips will help you squeeze the most out of your margins allowing you to work smarter not harder.
For more on managing growth in the building and construction industry, view the previous instalments in the series below or contact one of our experts.
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