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A lot of collective thought has gone into identifying best practices; most management get-togethers in our industry touch on it in one form or another. Some owner/operators have notebooks full of antidotal best practice stuff.
We, VITAL, have made a practice of capturing best practices so here is our top 12 list of practices that will produce better results.
Trade Partner Development The fact in luxury Ci is the architect, designer and builder get the client first; so having strong relationships (an ecosystem of sorts) will drive business over and over every year. Adding one trade partner per year is a best practice and takes focus on earning their business. Best practice find one like your best one.
Proposal Making We studied 60 different proposals on two scopes of work and came to the conclusion: that most miss the mark. You need to answer only three questions: what is it; why I need it and why from you, and, finally how much will it cost. Best practice proposals are shorter than you think. Focus on design or special requirements, convince them you are unique. No frayed wire splices please. Summarize don’t line item everything. Include proposal options and ranges. Always present in person.
Proposal Review Surprisingly not all proposals get a mgmt. review before going to the client. Each proposal should be tested before each delivery. Does it meet your mix standard >30% Labor >8% Parts? Is the scope complete? Pay close attention because here is where you make the money.
Design & Work Documents Much of what people are putting into proposals should be kept for design/specifying and work documentation purposes. These documents should detail tasks and enough detail for things to be built in the field or in rack building operations. Great documentation help everyone win.
Sales Compensation One area where there is very little commonality is in sales compensation. One goal is certain salespeople need to produce into the 7 digits. A $1M salesperson is marginal. The reason most do not is because we ask them to do too many other jobs. Keep them focused on sales, support them with design, engineering, project mgmt. staff. A salesperson should make 7% of the revenue they produce. We prefer a base of $50K to $60K then 2% on the 1st $1M; jumping to 5% on the next $1M and 8% above $2M. A $3M salesperson would earn 7% on this plan.
Key Performance Indicators Do you have metrics that make sense and can they drive the business? There are 6 simple ones: Revenue Growth, Profit Level, Cash Coverage of Deposits, Margin, Labor Productivity & Compensation as a percent of revenue. We provide these for QuickBooks users automatically in the cloud through our bi4ci dashboard service. They quickly benchmark your company and give you guidance on making improvements. Color coded info graphics make them easy to use.
Client Deposits These are a must for your business model and they need to be treated as gift cards until the work is performed. Getting paid ahead of time is critical to healthy cash management. Most companies carry 30-60 days of revenue as deposits/advances. High end clients will not resist paying ahead.
Request For Payment Being cash positive is a function of your terms and process for requesting cash. Why leave 10% for the end leave 5% and why tie payment to substantial completion versus a hard date. An agreed date at signing allows the requests to become automated; put on a calendar. It can be changed but that should be the exception. A diligent follow-up to each bill is required to keep clients paying on time. Train your clients properly. It’s OK to incentivize the collection person.
Inventory This is the most misunderstood aspect of the Ci business. So many companies do not keep an inventory item they expense it as it is received. This distorts revenue recognition and makes managing by the numbers more difficult. You should have minimum levels of inventory but frankly most CI companies do not. By keeping inventory items and releasing them as they are delivered you get better alignment of revenue and costs. Control inventory to be below 60 days of cost of goods.
Productivity Management We think labor revenue per tech each month is a great measure of productivity. But what’s the best practice? Knowing about 300 hours a year gets spent on PTO, days of training and company non-billable how does a company get 1700 plus billed hours? Answer: bill for everything the tech does; keep service out of this equation. A typical 8 hours should be billed to a client everyday. And, every project should have excess hours left to unassigned labor/support. Get to $12K to $14K a month per tech and you’ll be great!
Profit Math We know companies can be really profitable in this market. In fact, we have a simple calculation called profit math: its 60-30-10 which results in a net profit of 20%. Gross margin with all revenue and only materials cost is the 60%; many companies exceed this level. The next component is your total payroll, all in. It should not exceed 30%. And, the last is all other expenses, which should not exceed 10%. Of course, it’s not easy. But by bidding correctly, billing correctly and staffing to the right levels you can get to 20% or more net profit continuously.
Importance of Meetings Everyone hates meetings but effective meetings can make your organization so much more productive. Production meetings, sales meetings, financial reviews and project mortem rank amongst the most critical meetings for the business. Get people to prep before the meeting; always be on time and finish on time. Publish an agenda ahead on time and keep everyone accountable to action items. The good meetings can reduce so much chaos in the business.
If you feel like you apply very few of these practices today; don’t worry; most do not. If you work diligently on one or two each month, you’ll find you can embrace all of them in fairly short order. We hope you will.
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