On Target Contractor’s Blueprint Chart Your Course to Business Success

1. On Target Contractor’s BlueprintChart Your Course to Business Success Advisors On Target On Target Business Intensive: Session 3

2. Implementation Steps • Session 1 • Create a working draft of your Mission Statement • Create a working draft of your 1 and 5 year Vision • Answer the 10 questions on the handout • Session 2 • Review your own financial statements and chart of accounts with what you learned in Session 2 • Additional activities • Values Exercise

3. Profit Planning How to Increase Your Bottom Line

4. Your Business is an Investment to Make Money To do this, you must simultaneously increase three things: • Net Profit • Cash flow • Return on Investment (ROI)

5. How To Calculate Profit Margins • Gross Profit Margin (GP%) is profit derived from work produced divided by Gross Revenue Gross Profit Margin = (Gross Profit/Revenue)% • Net Profit Margin (NP%) is after-tax net profit divided by Gross Revenue Net Profit Margin = (Net Profit/Revenue)%

6. Key Profit Drivers • Work with these Key Profit Drivers to improve profitability • Focus on the areas where most potential increase in profit is possible • Price • Volume of sales • Variable costs • Fixed costs

7. Pricing Strategies • You can increase profit by increasing price as long as you don’t lose so much business that it reduces your net profit • You can increase profit by decreasing price as long as you increase volume enough to achieve your net profit

8. How Much Additional Volume Do I Need If I Cut My Price? Volume Increase To Give Same GP Price Decrease

9. Discount Price by 10%

10. What Volume Can I Afford To Lose If I Increase My Price? Price Increase Volume Decrease To Give Same GP

11. Increase Price by 8%

12. Cost Strategies • Increase Gross Profit by reducing Direct Costs • Labor • Materials • Keep Variable costs equal or below the rate of increase in sales revenue • Achieve greater productivity from resources that are financed by Overhead (Fixed) Costs

13. Cost Definitions • Direct Costs: Costs directly related to the production of revenue. • Variable Costs: Costs that can vary directly with sales revenue. Generally related to production but not a direct job cost • Fixed Costs: Costs that are incurred whether or not any sales are made. • Overhead (General & Administrative) Costs: These costs are generally fixed but some may be variable as well

14. Increase Gross Profit Margin To improve the Gross profit margin you need to work on these drivers: • Pricing & Estimating • Material Costs • Labor Costs • Production / service delivery processes • Customer relationships • Team Skills and Development

15. Lower your direct costs and Increase your gross profit • Decrease Cost of Labor • Decrease average wage on crews • Increase efficiency – bring jobs in on time • Decrease Cost of Materials • Increase Materials Markup • Better Estimate of Materials Cost • Negotiate better prices with vendors • Purchase in bulk

16. Working with Direct Costs

17. Improving The Net Profit Margin To improve the Net profit margin you also need to manage the following: • Administrative operating processes • Variable Costs • Overhead Costs • Customer relations • Administrative Team Skills and Development • Marketing Activities and Costs

18. Key Profit Drivers How can these drivers can be manipulated to improve profitability and to focus on the areas where most potential increase in profit is available • Price • Volume of sales • Variable costs • Fixed costs

19. 2: Working On Volume Of Transactions • You can increase profit by increasing volume of sales • provided that price remains constant so that the increase in volume translates in higher gross profit OR • You can increase profit by decreasing volume of sales • provided that the resultant saving in costs outweighs the reduction in gross profit arising from the decrease in volume

20. 3: Working On Costs Working Definitions • Variable Costs:These costs can vary directly with sales revenue, in other words when sales rise or fall, they rise and fall. • Fixed Costs:These are those costs that are incurred irrespective of whether or not any sales are made. They are usually associated with the physical capacity of the business to provide its service to customers.

21. Working On Fixed Costs • You can increase profit by reducing fixed expenses • provided that sales revenue does not decline or if it does, the reduction in revenue is less than the saving in fixed expenses. OR • You can increase profit by increasing fixed expenses • provided that there is a resulting increase in gross profit from greater market share or higher gross margin.

22. Working On Variable Costs • You can increase profit by decreasing variable or activity related expenses • provided that there is no change in product or service quality that could have a consequential effect on sales volume OR • You can increase profit by increasing variable or activity related expenses • provided that the improvement in product or service quality allows you to win greater market share or premium price

23. Profit Improvement Strategies Summarized • Increase sales revenue by increasing price and/or volume • Keep variable costs at least equal to or below the rate of increase in sales revenue • Achieve greater productivity from the resources which are financed by overheads The key is to understand the likely outcomes of each strategy. Proper planning allows you to work through each potential scenario and reduce business and financial risk.

24. Drilling Down Into Profit Improvement Planning: Understand The Components Of Sales Revenue TOTAL REVENUE = TC x NT x ASV TC = TOTAL CUSTOMERS = Number of customers at start -customers lost + new customers NT= NUMBER OF TRANSACTIONS = The number of times each customer deals with you ASV= AVERAGE SALE VALUE = The average value of each sale

25. How To Increase Total Sales Revenue • Get more customers • Improve customer retention rate • Improve return visit rate • Improve spend per visit AND • Have customers recommend you to their friends and associates

26. Summary • This module has focused on profit improvement strategies…how to make more money • We’ve covered the three key profit drivers: price, volume and cost • You’ve seen the impact of discounting prices as compared with increasing your prices • Our On Target Profit Planning Template can help you analyze where the potential for Profit Improvement lies within your business • It’s all about the phrase ‘What you can measure you can manage’

27. Creating a Budget to achieve your Profit Plan

28. Get to know your numbers Shape up your Chart of Accounts and Bookkeeping Plan for success – the budgeting process (informed by your business plan) Stay informed with timely reporting Know the score with ongoing monitoring of actual to budget performance

29. The Budgeting/Profit Plan Process Review your Business Plan Use your 2013 Monthly Profit & Loss Report as a guide Create a Profit Plan Implement Hours/Compensation tool to project labor cost and hours Evaluate other changes in Expenses Ensure budgeted hours will meet revenue targets Re-evaluate all components

30. Use Design Spiral Thinking What is revenue target? What is projected cost of direct labor? What other expenses need adjustment? Does budget achieve profit target? Do hours support revenue target? Should revenue target be adjusted? Does marketing plan support revenue target? Revenue Target Labor Cost Other Expenses Marketing Plan Hours Profit Target

31. Let’s look at an example…

32. Benchmarking Stats

33. Benchmarking Averages Direct Costs Materials Labor (without burden) Subcontractor Gross Profit Margin Variable Costs Overhead Costs Net Operating Profit

34. Monitor your Progress Incorporate Budget into QuickBooks Monitor Monthly & YTD Progress Make management decisions to achieve plan Identify Action Steps for upcoming month

35. Break Even Why Every Business Owner Needs to Know It

36. BEST PRACTICE GUIDE : Breakeven Sales Overhead Expenses* Breakeven Sales = __________________________ Gross Profit Margin Calculate by week, month, or year to manage your business effectively and keep a positive bottom line *Include Variable Costs, Overhead Costs and “Other Costs” if critical to business survival

37. Annual Budget Example

38. Annual Break-Even Revenue

39. Monthly Budget Example

40. Monthly Budget Break-Even

41. Calculating Break-Even Hours • Monthly Budget $48,000 • Based on 6 painters @ 160 hours each • Total Budget Hours 960 • Projected Sales Price per hour $50 (including materials) • If Break-Even Revenue is $37,333 • Break-Even Hours are 747 for month • (approx 174 hours per week)

42. What about other expenses? • Take into account other expenses that don’t hit the Profit and Loss • Owner Draws/Loans to Shareholders • Loan Payments • Credit Card Payments not included in monthly operating expenses

43. Changed Break-Even Break-Even Hours are now 780 for the month

44. What if your GP% decreases? Break-Even just increased by almost $5,000!

45. Using Break-Even Analysis to Add Infrastructure How much more revenue do you need for new overhead to at least pay for itself?

46. Adding a new overhead position

47. Knowledge is power • Knowing your numbers and learning how even small but timely changes affect your profitability increase your opportunities for success in any economy.

48. Financial Management Achieving Sustainable Growth

49. Cash Flow • Cash Flow Cycle • Cash Flow vs. Profit • Manage Cash Flow to fund your growth • Managing Invoicing & Collections • Managing bills & expenses • Managing financing • Monitor your metrics

50. Improving Cash Flow • Prepare a Cash Flow Projection • Manage Your Spending on a monthly, if not weekly basis • Invoice Promptly • Develop a systematized approach to receivables and collections • Develop a systematized approach to payables and debt repayment • Obtain a line of credit