The first reason why a bigger top revenue line only marginally affects one’s bottom line is that more errors are made with higher sales volumes; so gross margins typically decline by a few percentage points. Secondly, variable expenses - like sales commissions and payroll taxes - increase with higher sales volumes. And third, more staff people are usually needed to support the higher sales volumes, adding to the overhead.
By “sharpening the saw” on basic business finances, kitchen and bath dealers can indeed make more profit in this industry. What follows are eight fundamental strategies to boost your bottom line. The more of these strategies that your firm implements, the greater your profit will improve.
Strategy #1: Lower Cost Of Materials. The largest cost item on any dealer’s financial statement is their materials. Paradoxically, most dealers don’t channel any resources toward reducing this largest of expenses. Yet buying groups have been operating in the industry since mid-1994 and membership in one is the easiest way for dealers – even relatively small dealers - to make immediate progress with reducing this expense.
Strategy #2: Lower Cost Of Labor. The third largest cost item on a dealer’s financial compilation report is generally labor – averaging 10% of overall income. By using subcontract labor instead of payroll installers, a dealer will save on indirect costs like payroll taxes, vacations, workman’s compensation insurance, and health insurance. Furthermore, it has been proven that subcontractors can produce more volume in a year’s time than payroll installers because they have a monetary incentive to do so.
Strategy #3: Increase Gross Profit %. The vast majority of dealers are fearful that raising their prices will lose them business. But how is it then that one dealer in a marketplace can grow his business while operating at gross margins that are 8-10% higher than any of his competitors? The answer is more effective marketing built around the clients’ needs. Dealers in this industry must come to realize that how you deliver your products and services determine their perceived value. There is substantial proof that designers who interactively develop a layout and budget with their prospects earn high marks for their professionalism – sufficient motivation for prospects to pay a higher price. Up to 40% more!
Strategy #4: Add More Product Into The Sale. It is a lot easier to add more product into a sale where you have already gained the customer’s confidence than it is to find a new customer. Small add-on purchases - like plumbing fixture or appliance packages, lighting, flooring, snackbar seating, or new closet interiors – add profit with very little effort. Becoming a one-stop showroom is a smart strategy when dual income consumer purchasing patterns today are driven so much by convenience and speed. And it is easy to evolve into such a business model when a buying group membership delivers access to scores of vendor partners with quality products at favorable bulk pricing. Furthermore, the rebates they pay out on purchases directly hit a company’s bottom line. For some members that adds up to tens of thousands of dollars per year.
Strategy # 5: Lower Overhead. Personnel salaries are typically the second biggest cost item at around 17% on an owner’s Income Statement. SEN has found the use of spreadsheets help dealers to appreciate the true cost of an employee. “Burden” is a term used to cover all the indirect costs such as payroll taxes, vacations, sick days, retirement, etc. Once a dealer realizes the magnitude of these expenses, he is more inclined to explore different ways of reducing or eliminating them. For example, some dealers have eliminated both the cost of a truck driver and a delivery van by using a local moving company to receive in merchandise. This firm then redelivers the goods at a fixed expense when the job site is ready.
Strategy #6: Create Correct Price Formula. Most dealers don’t realize that there is a science to creating the correct price formula for their operation. It is the single, most important byproduct of the budgeting process. Ultimately, a firm’s price formula must “finance” all indirect production expenses (like truck drivers, trucks, warehouse rent, etc), selling and administrative expenses, and net profit. Once an accurate budget and price formula have been produced for a desired 10% net profit, a dealer confidently can put 10% of every check he receives into a liquid investment instrument as long as he is achieving his monthly income goals.
Strategy #7: Sharpen Financial Management Skills. Most kitchen and bath dealers really do not know how to read their financial statements. Or know how to use them to make sound business decisions. Or know how to ask the right questions to get more value out of their accountants and financial advisors. Until dealers feel as comfortable performing these assignments as they do in designing and selling a kitchen or bath, they will never realize their full profit potential. If dealers take time out for courses in financial and business management, this pervasive industry trend can be reversed.
Strategy #8: Implement Management Technology. The manual processes and single-focus automation tools (like a CRM or project management program) that most dealers utilize today are terribly inefficient. What’s needed is a comprehensive technology platform that integrates CAD (like 20-20) on the front end and an accounting package (like Quickbooks) on the back end – such as the ground-breaking NMS software that SEN Members are now gaining traction with. Not only is team productivity substantially enhanced, but NMS also enables dealers to accelerate the sales, ordering, and production processes so (a) 3-5x more revenue can be produced annually and (b) gross profit margins can be greatly increased because consumers perceive these progressive dealers as offering superior customer service. Something they are willing to pay for.
Together, these 8 strategies form the value proposition of a SEN membership. You will earn more (and learn more) with us than without us. As proof, we invite you to attend our next, industry-specific 4-Day Business School. You do not have to be a SEN Member to attend. However, there is a good chance you will want to join the group after this unique educational experience.
Copyright (c) 2017 by SEN Design Group