Author: KEITH LEWIS

The Purchase Order is one of the most important systems to help make sure you make money. Purchase orders provide the foundation to effective job costing and insures you get the facts on your production performance and profits. Here are the simple steps to implementing the Purchase Order System

• Begin by taking credit cards out of the hands of all field staff and managers.

While some owners entrust a credit card to a small number of individuals my recommendation is that you give credit cards to NO ONE in your company except a couple of trusted office administrators.

• The purchase order system should be controlled from the main office.

Assign both a primary and secondary purchase order administrator. The Construction Coordinator is an appropriate person to give primary purchasing responsibility, but it could be any office staff you choose. Use a spreadsheet numbered 1000 – 1999 for the primary and 2000 – 2999 for the secondary purchase order administrator. Once those numbers are used begin with 3000 – 3999 and so on. This allows you to know which administrator handled the purchase order. The purchase order register should record the date of the transaction, the name of the purchaser, the vendor name, the job name (customer), a brief description of what is being purchased, and a check box to indicate the original receipt has been received by the office.

Since managers and field staff no longer have credit cards the purchaser must call the office while at the vendor to get a PO number before they may purchase. For example, while at the check-out register have the check-out clerk call the office for the PO number and credit card authorization. Most retailers and vendors have no problem doing this. Once the purchase is authorized the clerk should be asked to fax or email the receipt directly to the office. Many vendors can automate this, so the receipt is sent automatically. If the primary purchase order administrator is unavailable, the secondary can be asked for the PO number authorizing the purchase.

Some vendors have the means to flag your account so that purchases can only be made with a PO authorization. If the vendor is unable to fax or email the receipt the purchaser MUST turn in the receipt to the PO administrator at the end of the day. Remember, the PO register has a place to check that the receipt has been received by the administrator. If it doesn’t come in, they can chase it down without much effort The PO administrator has the responsibility to not only record the purchase on the PO Register, but also to job cost the purchase to the appropriate job using your project management program such as System 100, Job Docs, DASH or others. These programs typically keep a running total of purchases, and adjust the overall profit percentage per job each time you make an entry.

Lastly the receipt should be uploaded as a PDF to the electronic job file to which it corresponds. In my company we had a unique fax to email phone number that receipts were sent to, and the first 30 minutes of each day a designated office worker was tasked with the “daily data dump” uploading information such as receipts to each job in our electronic job file. The hard copy can be placed in a hard folder either by job name or vendor whichever is preferred by the business owner.

• Reconcile credit card statements at the end of the billing period with the PO Registers.

This is how you insure that every single receipt for equipment, material and labor are job costed. Since the POs and the statement purchases are in calendar order doing so is not difficult or time consuming. If the charge is not found on the primary register look for it on the secondary register. If it is not recorded on either register, you have found an expense item that has not been job costed. The statement provides information for where the purchase was made enabling a PO administrator to track down the actual receipt from the vendor and get it properly recorded and job costed.

This same process should be completed for vendor statements. For example, if you have an account with Home Depot or Sherwin Williams and receive a statement of activity each month a review of all purchases against the PO register can easily be completed. You are simply looking for any purchase that was not recorded with a PO. If you find an omission, contact the retailer and find out who made the purchase. Coach, train and redirect the purchaser to eliminate the problem in the future. Record the purchase on your PO register, and job cost the purchase to the appropriate job. The same procedure is followed using company checks or direct deposits for labor or subcontractor payments. No check is delivered without a PO assigned to it. These procedures accomplish several important benefits regarding job spending and production management:

• Oftentimes construction workers overspend and oftentimes simply discard excess materials in the onsite dumpster or take them home for personal use.

For example, if the Xactimate materials list estimates 12 sheets of drywall are needed for a repair a worker might purchase 10 sheets of drywall at the start of the job. Several days later 5 more sheets are purchased, and the next day another 3 sheets are purchased. That is 18 sheets of drywall for a job that should require only 12 or 13. And remember you only get paid for what is reflected in your Xactimate estimate. All excess spending comes out of the owner’s pocket. Oftentimes this excess spending is never discovered, and therefore goes on and on and on with each new job. If the pattern was discovered it could be stopped. How do you prevent such overspending?

Using the purchase order system there is a record of who made the purchase(s). Management can coach, train and redirect the worker to monitor purchases according to the Materials List provided within the Xactimate scope of repair, and you can track down the final resting place of excess purchases and take appropriate action. Was the excess material returned to the vendor for credit, did it end up in someone’s garage, or did it get discarded into the job site dumpster? In any event corrective action can be taken to ensure that excess material purchasing ends. If the project manager in charge of the job is using the Xactimate master material list for the scope of repair, they can monitor materials purchased against the total quantity required to complete the job.

• Accurate job costing enables construction supervisors to assess the production management for each job.

The per job profit is a strong indicator of efficiency and effectiveness of operational systems. If the construction job profit is 40+% the conclusion is that material and labor costs are under control. If the per job profit falls below 40% someone needs to look deeper into the job management, and determine why and what to do next time to insure a higher job profit margin. Job costing gives you the means to determine if there is a problem and how you are doing. Purchase orders insure you have all the data available for thorough assessment. It also prevents overspending by controlling purchase transaction through the main office. As you can see the two systems (Job Costing and Purchase Orders) are complimentary and necessary to growing your business.

Reference: 6-Month Coaching Plan – The Profit Maker: Make More Money than Ever Before Managing Your Business Like A Pro! Subscribe and receive our weekly blogs in your email inbox at http://growmyrestorationbusiness.com/blog/

I must admit that I am not very supportive of commissions.

Typically, they are used as incentives to get employees to do better than they are already doing at their jobs. Incentives are used to coax the employee into better behavior, higher achievements, and improved results. They are paid extra if successful. The problem is rarely does this work. Rarely does coaxing or incentivizing actually produce better behavior. So the owner ends up paying twice for the behavior that should already be expected.

What might be better is to tie performance and outcomes to salary increases. What if you gave a modest salary increase every 3 or 6 months tied to the PMs regularly achieving a 40% GP on jobs they manage. If they reach the average of 40% average over the preceding 3 – 6 month period they get a raise –  if they don’t they won’t get it. This approach still requires proper training to insure they know how to manage to achieve a 40% profit, and that they are given the necessary tools to be able to do so (Xactimate Pro Project Management feature, work related use of spreadsheets, etc.). If they fail to meet the minimum of a 40% average across the board for their projects for 2 successive salary periods you should replace them. Why keep underperforming PM’s who continue to cost you money and fail to improve.

This might provide better incentive for improvement and better results for you. Otherwise, giving commissions on work performed rarely increases behavior or raises their performance bar to where you want it to be … so you pay money for what you should already expect from their performance and you get nothing in return. Some owners pay a lot of money every year on incentives that is wasted since it fails to inspire higher standards of behavior. You might be interested in this blog I previously wrote on the matter – http://growmyrestorationbusiness.com/employee-incentives-really-work/

Reference: 6-Month Coaching Plan – The Profit Maker: Make More Money than Ever Before Managing Your Business Like A Pro! Subscribe and receive our weekly blogs in your email inbox at http://growmyrestorationbusiness.com/blog/ – scroll to bottom of the page.

A change order is any change to the scope of work agreed to by the contractor and customer. In the insurance industry it is typically an upgrade or a downgrade to an already approved item of repair. For example, if a customer intends to change existing damaged carpet in 4 rooms of the house to hardwood the upgrade in material and labor costs represent the change order. So, how do you correctly do this?

• Duplicate the existing estimate and rename it with the ending – CO for change order. If Jones is the customer name, you can simply rename the duplicated estimate as Jones – CO clearly identifying it as a change order.
• Go through the entire estimate deleting every item that do not relate to carpet and pad. In the room select a single line item with a left mouse click, select Ctrl A to select all line items in the room, and then select Ctrl and left mouse click to deselect carpet and pad, and then hit delete. All line items in the room will be removed BUT carpet and pad. It takes just seconds in each room to do this.
• Next click on the carpet line item and select the button containing unit of cost. For carpet it will be approximately $2.25 depending on where you’re located. A new window will open to the right of the page where you can change the radial from Line Item to Credit Line. Hit the OK button to the left of the newly opened window and the line item will turn red indicating it is now a credit item.
• Do the same for pad and do this in every room where carpet is to be replaced by wood flooring.
• In each room now add the Category, Selection, and Activity code to add engineered hardwood flooring. To add/replace engineered wood the line item entry would be FCW LAMTD +. Next enter your Calculation code or manually enter the square footage. Hit OK.
• Do this for every room where engineered wood is to replace carpet and pad.
• Xactimate automatically calculates the difference in pricing between carpet and pad and engineered wood, and can be seen in the lower right corner of the Xactimate screen. If the number is a positive one it represents what the customer is required to pay for the upgrade. If the change order is a downgrade the number will be a minus and represents a credit to the customer.
• Have the customer sign the final document indicating approval and your change order is complete.

It’s just that simple! This procedure can be used for any number of changes to an existing estimate, and there is no need to separate each change into multiple Xactimate documents. Keep in mind that Supplements represent charges directly related to the scope of loss and damages and are covered by insurance, while the Change Orders are discretionary changes made by the customer for which they are personally responsible for the costs. Reference: 3-Month Coaching Plan – The Estimator Extraordinaire: Creating Excellence and Higher Profits in Estimating Subscribe and receive our weekly blogs in your email inbox at http://growmyrestorationbusiness.com/blog/

For some owners growing their business is given only an occasional thought. But gaining new business, sustaining healthy profit margins, and accelerating gross revenue growth can’t be done in your spare time.One writer states, “Unfortunately, this happens all too often, and in this scenario, securing business deals becomes accidental rather than deliberate.” Does this sound familiar?? Effective business development is planned, deliberate, and continuous. In my company we developed a three year proforma that was the center piece to my Business Development Plan. A 3-Year Proforma projects a reasonable and obtainable future revenue picture based upon past experience, environmental factors, and growth opportunities. Both actions and outcomes are projected, including projected growth based on expected areas of expansion. This is the business owner’s roadmap that directs the company’s action steps to sustain what you have and grow what you want.

If you don’t have a multi-year roadmap for growth you should begin working on one! Many companies remain small and struggling. The company makes just enough to pay the owner’s bills, but never becomes self-generating. By this I mean that when a company reaches a point when it no longer requires the owner to work in the business for its continued success, it has become self-generating. Sources of revenue will continue, managers run the operation in the owner’s absence, and procedures govern how the company runs. This is self-generating and this is the kind of company that someday can be sold providing for a handsome retirement. The alternative to being self-generating is being owner dependent. This kind of company will forever remain small and struggling to maintain itself, and likely will never become an attractive purchase for a buyer. What do you want for your future? It you want to someday sell your business you need to develop the business engine so that it can sustain itself and it’s growth, and not rely solely on the owner for its survival.

The most valuable use of an owner’s time is working on the business. This includes the internal assessment of procedures that govern how the work is performed, but also identifying external factors that lead to revenue growth. This really came home to me nearly four years before we sold our restoration and construction services company. I only attended one annual conference, and this particular year I attended a workshop on Exit Strategies. It was about getting ready to sell. I hadn’t really thought much about it, but the idea intrigued me. My biggest take away from the workshop was that I was too involved in my company’s daily operations. We were growing every single year, adding new staff, new layers of management, and new services. It was a dynamic place and I loved every day of it! But I was personally too involved.

I spent most of my time working in the business, and clearly not enough time working on it, in spite of the continuous growth. I made a commitment then and there to change my ways. I mapped out where change was needed, and what it would take to succeed. I spent more time planning for and executing business growth plans than ever before, and in one year our growth accelerated nearly 60%. The more time you spend working on your business than in it, will produce greater results than the other way around. Believe me! Many owners don’t know how to do this. If they did, they would. So involving a trained professional to get you headed in the right direction could make all the difference.

Putting in place a realistic and workable Business Development Plan that clearly presents your strategic plans for growth, includes appropriate tactical steps for implementation, and a proforma of financial cost and benefit could provide the roadmap needed to accomplish big things in becoming a self-generating business. One kind of business simply closes its doors when the owner is hurt or too tired to continue, while the other becomes a treasure to be sold that can provide a lifetime of retirement. What choice will you make? No matter what your needs, we promise to deliver objective, informed advice, and actionable plans for increasing your immediate growth, and sustaining long term revenue growth. Share this blog with others who may need to hear this message of hope and encouragement, and visit our website for additional resources or to download my FREE eBook How to Grow Your Restoration Business at www.growmyrestorationbusiness.com

To grow your restoration business your company must pass several critical financial stress tests. Following the 2008 recession Americans became painfully aware of the importance of financial stress tests for banks that were just too large to fail. Stress tests whether financial or physical are indicators of health. Do you have the time for a check up to see how your business is really doing?

Stress Test #1 – Is your business financial investment growing by at least 10% per year?

Most financial investors are happy if they earn a 10% return on their investment. Trying to top this with a higher return is risky and a lower return is disappointing. How is your ROI and how do you assess how well you are doing? Let’s begin by comparing your year over year revenue.

How much did your company revenue increase or decrease compared to the year before? If today’s number is larger than last year’s most owners tend to feel good about the increase.

Wait a minute – that is not a very good gauge of success. A more valuable way to look at revenue growth is to look at the past three years as a single unit of time.

The three year average annual growth rate does a better job of revealing your company’s growth trend and more accurately shows its current growth trajectory.

Complete this simple gross revenue exercise to identify your growth trajectory. Identify the gross revenue for each of the years 2012 – 2015 and follow this formula for each year – (2013 GR – 2012 GR)/2012 GR = %. This is pretty simple math. Subtract 2012 from 2013 and divide by 2012 equals the percentage difference between the two years.

This is your annual growth rate stated as a percentage of change for 2013. For example if your 2012 gross revenue was $570,000 and your 2013 gross revenue is $625,000 your calculation is (625,000 – 570,000) ÷ 570,000 = .096 x 100 = 9.6% increase in revenue growth for 2013.

Do this for each of the three years; add the three percentages and divide by three; and you will have your three year average annual growth rate.

This trend is worth identifying. Do it now and then come back. Did you pass the stress test by earning at least 10% return on your investment? Now apply the Rule of 72 by dividing 72 ÷ by your 3 year average to show how many years it will take to double your business at its current average annual growth rate.

What do you think about that?? Are you satisfied or not? The Rule of 72 shows investors that if they earn on average a 10% return their money will double in 7 years. Not bad! Most restoration owners have invested everything they have into their businesses. What rate of return do you expect?

If your business investment is growing at less than 10% on average annually you need help!

Stress Test #2 – Are you making at least 20% profit off your operation?

Read this carefully – The 20% Overhead and Profit a contractor earns from each damage repair job is a given. You are given that regardless of how well you manage your operations, equipment, material and labor costs. This stress test is about how much you earn beyond that 20% given. If you earn nothing more than 20% Overhead and Profit you fail the test.

How much effort do you think it takes to earn an additional 20% through operational controls and efficiencies? One would think that would not be too difficult for most contractors.

So if you earn 20% from Overhead & Profit and another 20% savings on equipment, material and labor charges (those are the classifications Xactimate uses as payment categories) you have a combined 40% net profit on your work. 20% profit that is a given and another 20% profit you have earned through good business practices.

That is not bad and if you can improve still further and earn 30% profit from operations resulting in a 50% per job profit you have done really well. Here is how you calculate what you are currently earning: Most contractors clearly identify construction expenses for equipment rental, construction materials, and subcontractor labor under the Cost of Goods section of their profit and loss report.

These three categories happen to coincide with the 3 classifications of charges that Xactimate calculates in every damage repair estimate. Totaling these three expense categories and dividing by the year’s total construction revenue will give you a good view of your percentage of profit on construction work.

Do that now for 2014 and YTD 2015 and see what you find out about your profitability. I talk with a lot of contractors every month and I find that most have little idea of their actual percentage of profit from operations. They have no process in place to track actual expenses against job revenue to determine the per job profit they typically earn.

One of my client contractors earned 21% profit last year on over $1 million in construction revenue. For all the work his company performed he earned 1% beyond Overhead and Profit. My experience is that the typical “well-run” construction services division earns around 28% – 32% from construction services.

That is a mere 8% – 12% profit earned beyond Overhead and Profit. In other words, on a typical $10,000 rebuild most contractors spend all but $800 – $1200 of what they are paid to do the job.

Wow, how tragic. All that work and effort for a pretty measly return! If it weren’t for the Overhead and Profit that is just given to contractors most would go out of business in a year.

What we need are contractors who are doing a great job and are earning 20% – 30% from their operation. The good news is that it is not that much harder to run a really good operation than it is to manage a mediocre one. That’s the truth!

Stress Test #3 – is your 10% return on investment funding your retirement and personal wealth building or is it going back into the business?

The truth is business owners needs a 20% net profit for both personal wealth building and for business development. Without a 20% net profit something or someone is suffering loss! The most common story for restoration business owners is they forego their own retirement savings and wealth building in order to put their meager net profit back into the business in the form of equipment purchases, new hires, and debt service to help the business grow.

If sufficient attention were given to earn a net profit of 20% there would be 10% profit to meet both personal and business needs!

Let’s identify your net profit as a percentage of gross revenue for years 2013, 2014 and 2015. Simply divide your net profit (the bottom line of your profit and loss statement) by gross revenues and convert to a percentage. For example if your gross revenue is $1.2 million and your net profit is $90,000 your net profit as a percentage is 7.5%.

Do this for three years and then divide by three in order to get an average annual net profit percentage. This gives you the clearest picture of how well you are doing at protecting your net profits.

Industry net profit benchmarks:

• Less than 5% = horrible
• 5% – 10% = poor
• 10% – 15% = average
• 15% – 20% = good
• 20%+ = outstanding

How did you do, and what do you think about your company’s profit margin? Is there enough profit to fund your retirement and business expansion?

Stress Test #4 – Is your financial float increasing faster than your revenue growth?

Now move to your company’s Balance Sheets for years ending December 31, 2012 through 2015. Identify the year end number for Accounts Receivable. Just like you calculated the percentage of change for each year’s annual revenue follow the same process for the percentage of year-to-year change for your Accounts Receivable. The formula is (2013 AR – 2012 AR)/2012 AR = %.

Compare each year’s percentage of change against the corresponding years revenue change. If your AR year-end percentage is increasing faster than your revenue growth you have a problem.

Many companies become less and less efficient the larger they become. If your collection process is deteriorating the larger you become I can already anticipate that you are facing significant cash flow problems.

The easiest way to determine the severity of the problem is to recall the scramble that occurs every payroll period. Are you frantic to collect everything you can, to put off paying other bills until payroll is met, or have you ever missed a company payroll deadline?

These are clear signs that you have a cash flow problem and this is dangerous.

Stress tests reveal indicators of business health. These indicators say that everything is OK, or they reveal weaknesses that need attention. In business there are few tests more important to an owner and the survivability or thrivability of his or her company than financial indicators.

Let’s get a grip on your financial indicators and determine what if anything needs to be done to put your business in a stronger safer position for the future.

If you are interested I would love to hear from you! Send me your numbers for each of these four stress tests and I will tell you what I think about them and what you can do to improve them. I hope to hear from you!! I would be happy to receive your comments on my website at http://www.growmyrestorationbusiness.com/blog