From The Detroit News | By Ken Calverley and Chuck Breidenstein
DETROIT, July 20, 2023 ~ Running a successful business is all about monitoring costs. If you’re a roofing company, you need to know what it costs you to put a roof on my house.
Some of those expenses seem obvious. The shingles and other materials we have to purchase from a supplier. The hourly compensation for the team that will install the system. The dollars spent on a dumpster for the old materials we are removing. The permits required for the job.
These types of expenses fall into a category we call direct costs, and few companies miss these.
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But the firm that is still around through five years of a bad economy to service that system you bought will monitor all related expenses and make certain that every job they conduct pays for itself in this regard.
What are some of these hidden or indirect costs? How about the weekly salary paid to those answering the phone?
If your company will install 200 roofs this year, then each roof must contribute one-two-hundredth of that expense.
Your storefront location has many monthly costs associated with maintaining it, from rent to taxes and upkeep to insurance, furnishings, and utilities.
Each of these items creates a cost category that every business must monitor and adjust on a daily or weekly basis.
When these costs change and the business does not adjust accordingly, the firm will start to engage that old adage about robbing Peter to pay Paul, i.e., the money needed to cover one expense will be taken or internally stolen to pay another.
The only place on a balance sheet where this can be done is under the heading of net profit. A company that is not profitable will not survive for long.
And what about the idea that we are using people at all levels to accomplish the tasks of the business? Are humans ever 100 percent efficient? Can the business owner count on his crew dedicating every minute of every hour spent on the job accomplishing the task at hand? No
A $20 an hour employee earns $160 in an eight-hour day, but how many hours of work did they accomplish toward completing that roof?
Each industry and every business within that industry must monitor efficiency. You must pay those employees for the time they spend in a vehicle heading to their job, but what if they are stuck in traffic?
Do they punch out for water breaks or trips to the bathroom? Who pays for time spent around the proverbial water cooler recounting the events of the past weekend?
It is estimated that good employees cost a company two to three times their hourly wage when such items are factored in along with the cost of benefits packages, workers compensation and other insurance, tools, equipment and materials that may not survive the task at end, etc.
So, a$20 an hour person must earn many times that for the company to be profitable.
Well-trained and well-managed staff are more efficient and deliver better value to the company client base.
Another good management technique might involve the purchase of large commodity items.
If a business owner knows they will purchase materials for 200 roofs this coming year, they may commit to a single supplier or manufacturer in exchange for better terms on the materials.
A manufacturer in this position may also provide training and product certification to the company staff in exchange for such a commitment. A manufacturer might also then extend the product system warranty for all roofs installed by this company, so the benefits extend to the customer base as well.
All of these extraneous costs are typically lumped under what many mistakenly call gross profit, but a company’s net profit at year end is only a small part of this number.
More often, we refer to this percentage of total cost as mark-up or margin, and it must be carefully watched and adjusted on a near daily basis as costs for everything from shingles to gas for the trucks fluctuate.
One local firm saw its work efficiency cut by 50% in one product category because of the wasted time spent trying to negotiate highway construction zones from one job to the next.
In cases such as this, a company cannot simply double the cost of its delivered service to offset the loss. It must strategically find ways to gain efficiencies elsewhere to remain both competitive and profitable.
Keep this in mind when shopping professionals. We commonly pay $5 for a cup of coffee where the actual coffee cost is less than 4% of that total.
Deal with well-managed and profitable firms that can deliver not only the product today, but the warranty and service you require years from now.
Companies like those you can find every day at InsideOutsideGuys.com.
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For housing advice and more, listen to “The Inside Outside Guys” every Saturday and Sunday on 760 WJR from 10 a.m. to noon, or contact them at InsideOutsideGuys.com.
