Qualified Remodeler Magazine

JUN 2017

Qualified Remodeler helps independent remodeling firms to survive, become more professional and more profitable by providing must-have business information, namely best business practices, new product information and timely design ideas.

Issue link: https://qualifiedremodeler.epubxp.com/i/835806

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Page 34 of 60

up the actual cost to produce the job and ensured the resulting sales price covered their overhead as well as their anticipated net profit. "e more they understand overhead, the more they understand the true cost of business, and then they can develop a sales price accordingly," explains Victoria Downing, president of Remodelers Advantage, a group dedicated to helping remodeling contractors achieve pro- fessional success. Some expenses, such as production managers and sales commissions, generate debate within the industry because they could fall reasonably into either bucket. If remodelers include these items in overhead, they must continually revisit their budget as they sell more jobs—or hire non- field production workers. Otherwise remodelers just need to make sure they can close contracts at a higher sales price to cover the increase in direct costs. "We want as many things in cost of goods sold as we can, so that we mark them up and have the client give us a legitimate markup to pay for our overhead," says Hanbury, who points out that incorporating all the labor burden items of field workers—including the field time of production managers and sales commissions—as direct costs also gives remodelers a more accurate sense of the true cost to run and perform jobs. A detailed chart of accounts, moreover, enables a re- modeler to track each job cost and overhead expense as they accrue during the year. Grouping together related expenses—for example, sales and marketing—allows the company to look at subcategories of overhead and com- pare amounts with previous periods to evaluate whether an expense has become a larger portion of the budget. Remodelers also should establish an extra column in their chart of accounts that expresses each overhead expense as a percentage of sales. Sales volume varies greatly among companies in the industry, so measuring expenses as a percentage of sales volume permits reasonable comparisons. "Anything you wanted to manage you would have an account for it, but you'd want it to be in a group so you o price a job correctly, remodelers need to cover the cost of completing the project but also pay for operational expenses and fulfill their desired net profit. Expenses, or overhead, keep the business running no matter how many jobs the company sells and, thus, do not apply to any single project. Once remodelers comprehend their overhead, they can calculate their proper margin and markup. "You really can't figure out what your pricing strategy is until you know your overhead," says Alan Hanbury, co-owner of House of Hanbury Builders in Newington, Connecticut. "Any other choice of markup or margin that you pick without knowing your overhead is just a guess at best." BASIC ORGANIZATION Many remodelers mistakenly classify direct costs as overhead and, therefore, do not charge enough for each job to cover their operational expenses. If they had accounted for all the direct costs before determining the sales price of a project, they could have marked Overhead Overview Remodelers who understand their operating expenses and the correlation with their direct costs improve their odds of being profitable. By Kyle Clapham T The biggest lie in remodeling is if you do good, quality work you'll be successful at business. If you do good, quality work but you don't charge enough, you will go bankrupt. – Les Cunningham, Business Networks SPECIAL REPORT: Business Benchmarking 34 June 2017 QR QualifiedRemodeler.com

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