GUEST POST: All It Takes is Common Sense to Improve Your Biz
Recently, an integrator I know goes to a trade conference. The principal hears a presentation on a new way to run his business, which is already generating a solid $5-6 Million in revenues. The presenter, a sort of business guru, is impressive and has authored a book.
This guru has a “system” he wants to sell you on…
The principal buys the book – making sure to get a copy for everyone in his company. Handing out the copies to his team, he tells them they need to read this book, because for the company, ”…this is the new path forward.” What could possibly be wrong with this story?
I obtain a copy and read the book.
Months go by, the book is on everyone’s shelf collecting dust. This book has some great ideas, but honestly, it is predominantly just a rehash of old business management ideas with new acronyms and pictures.
Be Your Own Guru
By their very nature, entrepreneurs are not trained in finance. They don’t want to be accountants, that’s why they started tech businesses. They have amazing talents and skillsets.
My advice to that integrator? Forget trying to overhaul your business with this new, proprietary system…starting from scratch, and trying to get 25 or more people on board with new and different processes. It just never works in any of these situations I have observed over the years. With a little common sense, you can be your own guru.
Do You Know What Your REAL Gross Margin Is?
Let’s start our discussion on how to be your own guru with the all-important topic of gross profit margin. Every integrator usually can tell you what they think their gross margin is. But each is using a different definition or formulation of gross margin. There just isn’t much consistency in these concepts across our industry.
My suggestion is to establish several revenue categories, easily done in QuickBooks – the most common accounting package for integrators – but equally easy in other similar accounting programs. For example, you might select:
- Product Revenue
- Installation revenue
- Engineering and Design Revenue
- Service Revenue
- Freight Revenue (from job bids)
Then establish, in cost of goods sold, complementary accounts for cost and expense tracking, relative to those revenue categories.
Avoid This Trap – Too Heavy a Focus on Product Sales and Costs
A key element is to break down the company’s payroll, allocating it to the above categories. Most payroll systems have processes to do this in direct reporting, with no math or tedious tracking required. Many companies put their entire payroll after the gross margin calculation on their profit and loss accounts. But this practice can be problematic. With payroll buried into one large account, there is no granularity, or visibility on the key critical elements to help calculate real gross margin.
When first implementing this same system with clients, I have watched as their management was shocked to discover that, for example, they have an overly heavy emphasis on product sales and costs. A common error by integrators, the danger with such an emphasis is that the internet and pricing are widely available, and this is the one area their clients can pick apart, and negotiate pricing downward. But clients have no idea of the labor or design complexity.
More Opportunites for Profit Enhancement
As you get a better handle on how a cost category more directly connects to the requisite revenue category of your proposals, you can discover more opportunities to make profitable adjustments. For example, a company may be charging just 1% or 2% for freight. Yet it’s an easy non-negotiable decision to make that 3%. Design and engineering is another category where integrators typically lose money by failing to load into that cost the payroll for design engineers. Usually, design engineers are amongst the highest paid employees at an integration company. I have seen charges of 3% baked into a proposal when the actual cost of providing design engineering may be closer to 5% or 6%.
Rather than engage in a difficult structural overhaul of your business processes based on some latest-and-greatest business guru’s presentation, this is where I would suggest you start. The result from proper tracking and formatting gives you a sense of your real gross margin. Again, to emphasize, this can be done relatively easily with your payroll system and accounting program.
Avoiding Eruptions by Keeping Owners Accurately Informed
Generally, I look at two things when first working with a client company – financial statements, and payroll by category. It’s easy to write an organization chart based on this information – and to judge where the revenue is coming from…and what its associated cost structure looks like.
This re-formatting keeps non-accountant principals accurately informed about the real state of their company’s affairs. I’ve seen owners erupt over a job that has lost money. Usually, someone then suggests they engage in “job costing.” But job costing is tedious forensic work that can’t reasonably be done for each and every job. So why wait for the fire to erupt?
There’s a lot of profitable tweaking that integrators can do, which takes advantage of the business you have already built…and does not require extensive surgery to an existing business.
It starts with a better understanding of your business via the commonsense process proposed here.
GUEST POST – Bob Brown
A well-known executive in consumer electronics, Bob Brown has deep experience in management, finance & sales. He has led high-performing manufacturers & also consulted with leading custom integrators on business improvement strategies.
You can reach him at: (email) email@example.com or (phone) 617.907.1121