Creating a wood flooring masterpiece takes time and patience. No one expects to install, sand and finish a custom floor in a day. The same can be said for creating a profitable business— you can't get everything you want done in an unrealistically short period of time. Wood flooring contractors need to invest time into their businesses, slowly building their profitability up year after year to reach their full profit potential.
The "NWFA Profit Report," compiled annually among NWFA-member contractors, continually demonstrates the major difference in profitability between the typical business in the industry and the most successful businesses. Elevating your business to this top tier of high-profit companies requires more than just wishful thinking. It demands some sort of action program.
In this article, I'll first compare typical and high-profit results to help you set a specific goal for profitability, and then I'll explain the "Five-Year Perspective," an improvement path for profitability based on a slow, steady approach.
The first of these objectives is extremely quantitative. The specific results achieved by the best companies are easy to identify and target. The second is much more qualitative in nature. It involves the reality of how fast profits can be improved in the real world.
An Obtainable Profit Target
The most fundamental issue in profit planning is to determine exactly what constitutes a realistic profit objective. While there are numerous ways to approach the issue, the easiest figure for contractors to look at is return on sales. This is simply profit before taxes (but after owners' compensation) as a percentage of net sales.
The chart below looks at the profit results for both the typical and high-profit contracting businesses in the industry. These figures are pulled directly from the "NWFA Profit Report." To make the analysis easier to understand, both the typical and high-profit businesses are assumed to have the same sales volume. In reality, this is seldom the case.
As can be seen in the chart, the typical company with $1,500,000 in sales generates profits of $45,000, or 3 percent of sales. Since this number is after compensating the owners for their time and effort in running the business, it is probably an adequate return.
However, on the same $1,500,000 in sales volume, the high-profit business produces a bottom-line profit of 7.5 percent of sales, which is $112,500. This means that for the same amount of effort, the high-profit business is generating an additional $67,500 in profits—not an inconsequential amount.
A realistic question for contractors to ask themselves is whether or not the results achieved by the high-profit businesses can be duplicated by the typical business. The answer should be a resounding "yes," but it needs some qualification.
In the "NWFA Profit Report," the high-profit group typically forms the top quarter of the businesses, measured in terms of return on investment. What this means is that one company out of every four in the industry is able to generate high-profit results. In theory, if this percentage of the companies can generate high profits, then every company should be able to.
If only one or two businesses were generating high-profit results, then it could be argued that a 7.5 percent bottom line is unrealistic. However, the fact that a large percentage of businesses generates such profits suggests that the typical contractor is failing to produce the additional $67,500 in profit that he deserves.
In short, every contractor should be committed to producing a bottom-line profit (after owners' compensation) of 7.5 percent of sales. However, it is essential to think in terms of moving toward the 7.5 percent number in a systematic manner.
A Five-Year Perspective
Flooring contractors tend to be highly entrepreneurial. This means that their motto can be summed up by: "There ain't no mountain I can't climb." This mentality, so helpful in sales and marketing situations, can be disastrous from a financial perspective.
For the typical company with profits not as high as they should be, closing the profit gap should be thought of as a five-year effort. This means that the business would reach the desired 7.5 percent level at the end of the fiveyear period.
Many owners are appalled at such a lengthy planning cycle. There is a natural tendency to want better results immediately. The thought of waiting five years to reach optimal results is simply unacceptable. Owners need to wean themselves from the instantgratification concept and take a longer-term perspective with regard to profitability. In exchange for this longer-term view, though, they must adopt the concept of sustainable improvements, which simply means that profits will get a little bit better every year. There will not be a pattern of two years of improvements followed by a year of lower profits.
In exchange for smaller annual expectations, owners must strive for continually better results. Those improvements must be produced in good economic times and bad, with and without new competition. Sacrificing speed in exchange for permanence means the company is building permanence in its profit position. It is the only trade-off that will get the firm to where it needs to be in five years. Other approaches will provide great results, but only episodically.
Companies that attempt to get to high-profit levels immediately are following what is commonly called the "one-year plan." It is probably as negative an approach as can be developed. With the one-year plan, the business develops an extremely aggressive plan for the year. Everybody is motivated to try to reach the target, but it proves to be overly optimistic. At the end of the year, the target is not met. Next year, the company sets another aggressive plan and doesn't meet it. This pattern occurs year after year.
Over time, the company tends to develop a way of doing business that is self-defeating. It involves a mindset that goals are merely put together as an exercise. They end up having nothing to do with guiding the business in the future. Such an approach is worse than having no goals at all.
Moving Forward
Becoming a high-profit contractor requires moving away from just working hard and doing as many projects as possible. Businesses must be run with a specific financial plan. As part of that plan, it is best to think in terms of moving the company toward the high-profit level of performance. This is a level that lots of companies have proved is attainable.
In addition, the company needs to take a slower approach to reaching high-profit levels. The business should plan for slightly higher profits, prove it can reach that higher level, then move to an even higher level the next year. In this way, it can build a sustainable profit position.
