Operating a professional business
Peter Brueck
WHAT IS A PROFESSIONAL BUSINESS
•Profitable
•Strong customer base
•Happy staff
•Safe work environment
•Ethical
•Systemised
•Has review processes
•Believes in training
•Saleable
TURNOVER IS NOT PROFIT
Overheads
Refers to all ongoing business expenses not including or related to direct
labour, direct materials or third-party expenses that are billed directly to
customers. Overhead must be paid for on an ongoing basis, regardless of
whether a company is doing a high or low volume of business. It is
important not just for budgeting purposes, but for determining how much a
company must charge for its products or services to make a profit.
Gross Profit
Gross margin is money left after subtracting the cost of the goods sold
from the net sales and can be a dollar value (gross profit) or a percentage
value.
Net sales are the total value of sales for a given period less any discounts
given to customers and commissions paid to sales representatives.
Gross margin is not commonly used for service businesses as they usually
don't have cost of goods.
TURNOVER IS NOT PROFIT
Formula
Gross Profit (dollar value) = Net Sales less Cost of Goods Sold
Gross Margin (percentage value) = (Gross Profit dollars / Net Sales
dollars) x 100
Gross Profit
Examples
Gross Profit: $52,000 - $31,200 = $20,800
Gross margin: $20,800/$52,000 x 100 = 53.85%
Using the example figures Joe's Irrigation Shop has a gross profit of
$20,800. The business's overhead expenses must be less than this to earn
a profit.
Once you have your gross margin you can calculate your net margin.
If your overheads are higher than the gross profit you are going
backwards
Net Profit
Net Profit is your profit before you pay any tax (tax is not included
because tax rates and tax liabilities vary from business to business). Net
margin is your gross margin less your business overhead expenses.
TURNOVER IS NOT PROFIT
Net Profit
Formula
Net Margin can be calculated as follows:
Net Profit (dollar value) = Net Sales less total of both Cost of Goods Sold
and Overhead Expenses
Net Profit (dollar value) = Gross Profit less Overhead Expenses
Net Margin (percentage Value) = (Net Profit dollars / Net Sales dollars) x
100
Example
Net profit: $20,800 - $15,600 = $5,200
Net margin: $5,200/$52,000 x 100 = 10%
If the net margin is 10 percent then for every dollar of goods sold you will
make 10 cents in profit before tax after all the cost of goods and overhead
expenses have been paid.
Using the example figures Joe's Irrigation Shop will earn 10 percent of
$52, or $5.20, from every sprinkler sold.
TURNOVER IS NOT PROFIT
Markup
Markup is the amount of money above the cost of purchase or manufacture
you sell your goods for. The price of goods sold needs to cover the cost of
goods plus overhead expenses and allow for profit to be earned.
Creating a sale price
((Net cost x overhead margin) + net cost) x (profit margin) + ((Net cost x
overhead margin) + net cost)
Net cost = $100.00
Over head margin = 30 %
Profit margin = 20%
= (100*.3) = 30
= (100+30) x .2
=$156.00
So be careful when discounting
Assume the list price of a sprinkler is $200.00
Then the maximum discount you can give is 22%
DON’T LET THIS STATEMENT BE TRUE FOR YOU
HE WHO MAKES THE MOST MISTAKES
WINS
UNDERSTANDING THE NATURE OF YOUR BUSINESS
WHERE ARE THE COSTS
DIRECT COSTS
•Materials /parts
•Equipment hire
•Labour/ subcontractors
•Machinery and vehicles ( fuel/ consumables)
•Replacement of hand tools
•Site allowances
•Special project requirements
(e.g. routine inspections, project specific insurances)
CONSIDERATIONS IN CALCULATING CHARGE OUT RATES
How many chargeable hours you can work.
Typically you will have 2080 hours in a year (40hrsx52weeks).
What you need to give consideration for are:
•Holidays 3 weeks.
•Statutory Holidays 2 weeks
•Sick 1 week
CONSIDERATIONS IN CALCULATING CHARGE OUT RATES
How many chargeable hours you can work.
So 52 weeks now becomes 46 weeks or 1840 hours for charging
clients. 1840 hours seems reasonable but have you considered
the Non chargeable activities such as:
•RDO
•Rent/ Mortgage
•Power, water and communications
•Office equipment
•Bank fees/ overdrafts
•Insurances
•Specialist services ( e.g. Accountants)
•Licences and memberships fees
•Advertising
•Vehicle expenses repayments, rego , services
•Machinery expenses
•Full time staff wages and entitlements (e.g. long service)
•Wet weather
•Project time overruns
•Warranty calls
•Lost or damaged materials
OTHER ITEMS OF COST TO CONSIDER IN THE PRICE
How the little thinks add up
Cost per unit of a DBY
Retail
Discount
Net cost
$3.00
55%
$1.35
How many do you need to sell to recover 1 lost joiner
Using 30 Overheads and 20% profit
Your sale price = ($1.35 x .3) = $1.75
Profit
= $1.75 x .2 = 0.35
So just to break even
$1.35 / .35 = 3.8 just to cover the cost and there is no profit
yet.
I HAVE A RATE NOW WHAT?
You need to know if the rate is competitive. Just because you have a
charge out rate does not mean that it will be profitable and win business.
What does it mean if my rate is lower than the average?
 A lower than average rate offers opportunity to win business
 Because you are lower does not mean it is better to stay low.
Charging too little is as bad as charging too much as it may
undermine consumer confidence in you business. Is he a cowboy?
Will the job be cheap and nasty or
 Are you a smarter and better?
 Ask- are the costs low because I have not taken in something? Or is it
because I run a very tight ship, smarter and control my costs?
What does it mean if my rate is too high?
 Am I being too unrealistic in my rates?
 Have I got control of by business costs?
 Am I comparing my price with a low baller and should I match him?
 Does my work command a premium due to reputation?
 Can I justify value add i.e. loyalty discount?
SELLING YOURSELF
Where do you start
•First impressions
What do you want to know from the customer
•What market do they fit; domestic, DIY , commercial
•Where did they find out about you
•Repeat customer
•Recommendation
•Web /advertising
Understand your Customer
DIY and domestic
•Think about their cultural back ground
•Their age
•What knowledge do they have about irrigation
SELLING YOURSELF
What tools can we use
•Google Earth , Nearmaps
•Manufactures websites
•Irricad, Autocad, Webcaps, SpacePro
•Examples of similar projects
•Company promotional material
How do you present the quotation
•Generally you should respond with 5 working days
•Always in written form
•Send as an attachment in PDF format
What to include
•Company introduction and experience
•Overview of the proposed system including nominated brands
•Quantities of items (not a shopping list)
•Price
•List of conditions
•Copy of the Code of conduct
•References
SELLING YOURSELF
Follow up
•Ring to make sure the quotation was received
•Make a time to call back to discuss the quotation
Installation phase
•Pre-start meeting with Client and installer
•Regular inspections and contact with the Client
•Hand over checklist
•All sprinklers checked
•Trenches backfilled correctly
•Site is clean
•Explain to the Client
•The controller operation
•How to shut the system off including location of isolation valves
•Supply WAE plan
•Client sign off
REVIEW
Project review
•Speak with installation crew
•Compare project cost to quotation
•Contact Client
•Check they are happy if not why and what do you need to do to solve their
issues
•Ask for a reference
Filing System
•Site book; installation notes, photos, client meetings notes
•Work as Executed drawing / sketch
•Parts list