Dec 30, 2015

Guest Blog By: David Romano, Benchmarkinc Founder

The holiday season is filled with such special moments, such as the smile on the face of your children as they open the most perfect Christmas presents, and the awesome kiss you get from the one you love on New Year’s Eve!  With all of those wonderful events comes the proverbial reality smack on the face for many entrepreneurs – it is also time to plan for next year by building a budget and determining breakeven (the killer B’s).

For many restoration owners, this activity is deemed either unnecessary or uncomfortable because they either feel like they are in such control of the business (which is never true), or it is so hard to do that they would rather just plod along as usual and be content with the ebbs and flows of the year.  Now for those that are truly driven to win, creating budgets and determining breakeven is just as rewarding as the most special holiday events.

Creating budgets sets the stage for what you believe is winning in your business and builds the guidelines for which your team should operate within.  I ask all of you who do not create budgets, “How do you know if your business is doing well if you didn’t even define what good looks like” and “How are you going to hold your team accountable when they don’t even know what is expected?” Going into an NFL game without a playbook would tag your team as one destined to fail, right?  So isn’t that the same thing for your business?

Breakeven tells you what your business has to generate, at its current gross profit level, to not lose or make money.  This number must be closely monitored, because if expenses are added or decreased and/or the gross profit changes, so will the breakeven.  This number should be top of mind and at all times and must be the catalyst for all sales efforts.  Staying below this number for a prolonged period of time will highlight a business that may not be sustainable.  Additionally, once breakeven is achieved the rest is pretty much gravy because all of your fixed expenses are covered; and after variable expenses are paid, all that remains flows to the bottom line.

As a New Year’s resolution, make it a priority to build that budget and calculate your breakeven.  You owe it to yourself, your staff and your business.  Vince Lombardi once said, “The quality of a person’s life is in direct proportion to their commitment to excellence, regardless of their chosen field of endeavor.”  This is as true in football as it should be in your business.  Happy Budgeting!

The Joy of Budgeting and Breakeven #2

Jan 5, 2016

Guest Blog By: David Romano, Benchmarkinc Founder

News flash:  You don’t need an MBA to build a robust budget and calculate breakeven.  When broken down into small bit size chunks it is actually pretty simple.  One caution is not sweat the small stuff because trying to figure out if the utilities should be .5% or .51% of sales won’t make enough difference to waste time being to analytical.  Additionally, hiring or acting like an economist who graduated from MIT when building a sales forecast is also an exercise in frustration with not much return.  Here are the simple steps:

1. Build a historical picture of sales and expenses
   • Most would tell say that you need at least five years but with the volatility of the industry three years should suffice
   • This will provide the framework to determine your variable expenses such as cost of goods sold and other operating expenses such as vehicle gas and maintenance, office supplies, utilities, etc.
   • It will also map out your sales curve that will be used to spread out the projected increase or decrease in sales
2. Spend no more than an hour determining if the next year is going to be better or worse in sales volume
   • You may also want to determine the mix of business (mitigation, reconstruction, contents, new construction, etc.) to make necessary adjustment to your cost of goods sold
   • Plug your projected sales into your sales curve to properly spread out the volume throughout the months
3. Once you have determined the volume now use the historical expense percentages to build your operating costs
   • It is easiest to treat all expenses as variable until you complete the next step
4. Calculate your fixed expenses such as salaries, occupancy expense, insurance, and advertising; yes, advertising should be a fixed expense because you should have planned this out for each month as well
   • Override all of the pre-calculated lines of the budget with these fixed numbers
5. Say a prayer, cross your fingers, and hope that what you outlined is going to show a profit
6. Meet with the key members of your team and fill them in on the financial plan and ensure everyone is on the same page and agrees what you set is achievable

Now that we got that out of the way there is one task left – calculating breakeven.  Many of us consultants like to overcomplicate things to make us look more important to the success of your business and a breakeven calculation is one of the areas we tend over engineer.  There are two simple calculations, that will get you very close to the over-engineered versions.

The first is what I call the Operating Breakeven, the amount of sales required for a company to breakeven on paper.  OPERATING BREAKEVEN = TOTAL OPERATING EXPENSE $’S / GROSS PROFIT %.  If you have $1,000,000 in operating expenses and your gross profit is 36% then your operating breakeven is $2,777,778.  The second calculation I term Cash Breakeven and it is even more important than the first because it forecasts the amount of sales required to produce enough cash to operate.   CASH BREAKEVEN = TOTAL OPERATING EXPENSE $’S + CASH REQUIREMENT FROM BALANCE SHEET / GROSS PROFIT.  If you have $1,000,000 in operating expenses, and principle payments to loans that equal $100,000 per year, and your gross profit is 36% your cash breakeven is $3,055,556.  Big difference right?

Dec 22, 2015

Guest Blog by David Romano, Benchmarkinc Founder

For those of you who find yourself constantly overwhelmed at work, I have a great gift suggestion.  Grab a cup of coffee, settle down in your most comfortable chair, and crack open the book, “The E-Myth Revisited” by Michael Gerber.   If you haven’t read this book, it just may change your life as a business owner.   If you have read it and you are still stuck working in your business instead of on it, time to read it again.

The book teaches the reason most small businesses fail is that they are run by a technician, someone who knows how to do the work but doesn’t understand how to be an entrepreneur or a manager. An owner should have all of these traits, but must know when to take on the role of each. It is critical that for no extended period of time can the owner get stuck in one role.

• The technician is an expert in his/her craft (a Project Manager, Estimator, Superintendent, Water Tech, etc.). This often leads these people to go into business for themselves – they’re good at what they do, and they know it; so why not reap the rewards of their labor? The technician is happiest doing the work they are good at and ignoring the rest, which is in the end, a recipe for failure.
• The entrepreneur is the dreamer, the one who sets out to do something new, who reaches for the stars. The entrepreneur lives in the future, thinking about what could be (rather than in the present). The entrepreneur is often frustrated by how slow the world seems to move.
• The manager is the detail-oriented one, who dots the i’s and crosses the t’s, the one who remembers to pay the bills, and wants a well-organized world without surprises, a world where things happen in an orderly, predictable manner.

All of these components are necessary in the founder of a business: without the entrepreneur, you might as well keep working for someone else as a technician. Without any technical ability, the entrepreneur must rely on others to get anything done, and without the organizational abilities of the manager, the other two would probably find themselves without power in the company because they had other things to do than pay the bills.

If the business is to thrive, it must move beyond the founder: a business that is wholly dependent on the founder and their abilities is not really a business, but rather a very burdensome job for the founder. Every time you are out sick or take a vacation or are otherwise absent, the business stops too.

A real business is one where the founder has created a system so that the business can run itself without their constant presence, and where he/she spends their time observing and managing the performance of their team within those systems. In fact, data shows that the most profitable owners take over three weeks of vacation per year!

So the question now becomes, what is the best system? Quite simply, the right way to run a business is to do just that – run it. Run it through managing people and systems. Meet with the team, design agreeable systems, and then ensure protocol is followed by observing and measuring. If this is done, it will allow an owner the luxury of being more of an owner and manager than getting dragged into the constant technician role.  And isn’t that what you envisioned when you had the crazy idea of starting your own restoration business?

Dec 7, 2015

Guest Blog by David Romano, Benchmarkinc Founder

Eighty-eight percent of current family business owners believe the same family or families will control their business in five years, but succession statistics undermine this belief. Only about 30 percent of family businesses survive into the second generation, 12 percent are still viable into the third generation, and only about 3 percent of all family businesses operate into the fourth generation or beyond. The statistics reveal a disconnect between the optimistic belief of today’s family business owners and the reality of the failure of family companies to survive through the generations. Research indicates that family business failures can essentially be traced to one factor: an unfortunate lack of family business succession planning.  (Family Business Institute)

An increasing trend in the industry is that the next generation has no interest in continuing the family legacy because they witnessed the level of commitment from their parents and value “having a balanced life” more than owning a business.  Now let’s say that there is the interest from the next generation and that they are indeed equipped to assume the reins; these new entrepreneurs face a more complicated world than their parents did when they founded and built their businesses.  In contrast to publicly owned firms, in which the average CEO tenure is six years, many family businesses have the same leaders for 20 or 25 years; and these extended tenures can increase the difficulties of coping with shifts in technology, business models, and consumer behavior.  Couple these issues with the fact that the founder may still be actively involved, and the job of running a family business becomes monumental for the successor. (Harvard Business Review)

This information is not intended to shock or depress, it is meant to wake up or fire up restoration owners to come to the realization that now, more than ever, having a Succession Plan of when and how to sail off into the sunset is critical and taking the proper steps will minimize the risk of transition failure and increase the likelihood that outside investors will take a sniff.

Keep in mind that “Succession Planning” is a process, not an event. Even when the formal Succession Plan is in place, it must be a living, breathing and evolving document which is reviewed and updated from time to time to reflect changes in the marketplace, competitive conditions and the health or capabilities of the current leadership.  Building this plan should occur when owners still have enough “gas in the tank” to properly prepare those who will run the business or do their best to instill sustainable systems to make the business attractive to potential buyers.  Waiting until you cannot take it anymore and rushing this process is most likely going to lead to you having to reenter the business at a later date to provide resuscitation or draw less investor interest and/or a lower purchase price.