May 17th, 2012
Are Window Dealers Making a Profit?
Hopefully your window dealers’ hard work is paying off right now. Good weather has let them install product. Their phones are ringing from yard signs, they’ve canvassed neighborhoods and done proximity mailing to create leads. Estimates are coming in over the phone and the Internet. They’ve sold more jobs, received deposits and ordered more windows. They should have more money in their bank account than payables. But are they profitable? The sad fact is, they probably don’t know.
Yes, I think most contractors and dealers think they are selling for a “profit”… Oftentimes they are just using bad math…
Using a Tailgater’s math, profit is anything over the cost of the window.
Using a Contractor’s math, profit is anything over the cost of installation labor and material.
Using a Dealer’s math, profit is anything over the cost of installation labor, material and sales commission.
Too many business people never get a clear understanding of their cost of doing business. When they have extra money in the bank they think they have made a profit. That’s when they advertise, buy a new truck or take a vacation. All because they think they have made a profit…But is that extra money really profit?
No. Not yet.
You can certainly think you have made a profit and feel like you have made a profit in June when the income is bigger than the expenses, but if you don’t factor in the October real estate tax, or the quarterly income tax, or the Health Benefit bill, or the cost to replace that truck, or additional marketing efforts. UH-OH …. That extra money is not a profit at all. That extra money is simply a “Contribution to Overhead.”
Too many window contractors and dealers don’t calculate overhead into the equation in order to price for profit. You have to take into account all of your company’s cost of doing business to get a clear picture of your overhead and then cover all those costs. Once you have paid for all of your overhead costs you can consider yourself to have made a profit. You have now “Busted Your Nut” and, like a squirrel who works hard to get to the meat inside of the shell you can enjoy true profit. Until you know your annual overhead costs you don’t know when you make a profit–you are only guessing.
Calculating overhead based upon past experience is a logical way to budget for the coming year. Simply place all expenses into their appropriate category, create a budget for each of those categories and plan your budget for the next 12 months based on those figures and your plans to improve upon them. Create a budget and follow that budget. If the local school board raises taxes or the furnace needs replaced in your showroom the real estate budget needs to be adjusted. If you decide to invest more in advertising than originally planned the advertising budget needs adjusted, and so on. Each time the budget is adjusted the overhead number changes and the contribution required to pay for overhead changes, too.
Using this method you will have a dashboard that lets you see where you are during the course of the year on the road to profitability. At some point during the year you will have either contributed enough money to your overhead costs to allow you to make a profit or you will have not.
In the food business a general rule of thumb to calculate expenses compared to profitability in order to set price is “a third, a third and a third.” Thirty-three percent is the cost of food, 33 percent is the cost of labor and overhead and 33 percent is profit. This also used to be the rule of thumb in the window industry and that math is more likely to allow you to end up in the black, but it is still all based on projections for annual expenses and sales income that may or may not happen. If your sales are sluggish and you can’t get the percentages you projected you might cut price and then you are doomed to sell below a profitability. If expenses for labor or materials escalate due to poor time management or mismeasured windows your expenses will crush profits.
Sorry to say, but for most businesses it really does come back to “Nothing Happens Until Somebody Sells Something.” But don’t forget the end of that warning: “From there anything can happen. Good, Bad or Indifferent.” So, a lot of the ability to profit has to do with the quality of the sale, not just the quantity. The rest of the ability to profit involves good accounting practices, budget discipline, management skills and good work habits.