A recent article in our local newspaper about evaluating the qualifications of teachers around the turn of the 20th century caught my attention. The writer related some of the questions that were used when assessing candidates for teaching positions in public schools. The question made me consider how we determine the profitability of a restoration business. Here is one of the questions used to assess a potential teacher’s ability in mathematics about 120 years ago:
Suppose I pay 3 31/48 cents per bushel for carting my wheat to the mill, the miller takes 1/16 of a cent for grinding, it takes 4 1/2 bushels of wheat to make a barrel of flour, I pay 25 cents each for barrels and $1.25 per barrel for carrying the flour to market where my agent sells 60 barrels for $367.50, out of which he takes 25 cents per barrel for his services. What do I receive per bushel for my wheat?
It sounds like a bit of a brain teaser, and I’m sure some of you are wondering, “What the heck does this have to do with the profitability of my restoration business in 2021?”
How to Improve profitability
The article got me thinking about how well we really understand the profitability of a restoration business. You’ve probably recently gone through the process of putting together the business plan of your restoration business for 2022. If so, then in many cases, one of your areas of focus is on improving profitability. When doing so, here are some of the questions you should have considered:
- How do we know it’s possible to increase our profits?
- What benchmarks or standards are we using to determine what our profitability could be?
- How have we gone about assessing where the opportunities for improvement lie?
- Do we understand our profitability by service or product line to the point that we can determine whether some parts of our business are profitable and may be subsidizing others that are not?
- How much improvement is possible, and what should our targets in specific areas be for 2021?
- Have we done enough of a deep dive to know which cost items offer the most potential and are the areas where we should focus our efforts?
Chances are good that even if you considered some of these questions, you probably didn’t consider all of them. You may be wondering where you should even start for finding the profitability of a restoration business! Allow me to offer some suggestions:
How to Calculate Profitability of a restoration business
- Start with the cost of sales (COGS) items that represent the biggest portion of your revenue:
- Direct Labor is typically the largest single-cost item. Subcontracting—an alternative to using in-house labor—may also be significant, especially if you are in the rebuild or construction business. Materials and Vehicles, along with all related costs like maintenance, fuel, and insurance, likely round out the top four.
- Identify industry benchmarks for total COGS and targets for the above four items (expressed as a percent of total revenue) based on the lines of service you offer.
- Compare your performance to the benchmarks and see where the gaps are the largest.
- For your overhead or fixed expenses, start with the total amount, again expressed as a percent of total revenue.
- If the answer is greater than 30%, there is an opportunity to either shrink your fixed costs or you may have an organization structure that is scaled to support a higher level of revenue. As revenue grows, if you maintain the same number of overhead staff—owners, managers, accountants, salespeople, etc.—the total cost of these positions will represent a smaller percentage of your total revenue.
- A note of caution: Be careful not to misinterpret what I am saying. DO NOT think that you can simply “grow your way” to profitability. You must manage both your COGS and overhead costs at all times.
- Marketing is an overhead cost that is critical to maintain.
- This is one where some “inverse logic” applies. In times of reduced profitability, do not give in to the temptation to cut investments in sales or marketing. While doing so might result in a short-term boost in profits, it will likely derail your ability to grow your restoration business in the longer term.
- Typically, the total of all sales and marketing costs—including Business Development Reps, their expenses, website maintenance, advertising, printing, and costs for other marketing materials and event sponsorships—should total 7-10% of total revenue. Smaller, startup businesses that are experiencing rapid growth will likely have a higher spend. Larger, well-established companies may get that percentage down to 5-7% of revenue.
The above questions and guidance are all relevant in a “normal” year under “normal” conditions. 2020 was anything but normal and chances are that at least part of 2021 will follow suit. The COVID-19 pandemic and related effects on specific industries had a significant impact on most companies—some positive, some negative. Be sure to consider the impact that COVID-19 had on your restoration business. Was it positive or negative? As a result, did you make changes to the services you offer or place emphasis on different markets than in the past?
Protecting Profitability Long-Term
The biggest question all businesses are facing is whether these changes are short-term in nature or are more likely to be permanent. It’s quite possible there are some ways in which business is likely never to return to the way it was, especially in the disaster restoration industry.
Invest In The Future of Your Restoration Business
Your answers to these questions should drive your focus when it comes to your restoration business and maintaining or increasing profitability. If you saw a significant increase in demand for disinfecting and cleaning services, for example, do you think that higher demand will continue in 2022 and beyond? If so, what internal changes should you make in your business to capitalize on that demand shift? Here are some possibilities to consider:
- Investment in equipment and materials.
- Training for technicians and service specialists who deliver services.
- A change in focus for Business Development to market segments where these services will remain in high demand.
Consider New Service Offerings
The same thought process applies to services or markets where demand was negatively affected by the pandemic. Is the drop in demand temporary or do you see more permanent changes that mean the shift is likely to last? If longer-lasting effects are expected, think through the following as you consider future sources of revenue and profits:
- Which customer industries or markets no longer justify the investment in marketing and relationship development that you’ve been making?
- Are there more cost-effective, less human-intensive options for reaching and maintaining contact with prospects and customers for some markets?
- Are there ways you can bring more value to existing or new customer groups based on the skills, services, and resources you offer and the changes that have taken place in their industry?
The fact is, you may not have the answers to these, and other, questions raised by the changes that have impacted us all over the past 10 months. 2022 may be a year of finding those answers and making decisions about where your restoration business is headed, where to focus, what to stop doing, and where new opportunities offer more promise for profitable growth.
Conclusion for the Restoration Industry and Your Business
Now, more than ever, it is critical to understand our markets and our customers, what they want and how they want it, how it all impacts our organization’s ability to adapt, refocus, and retrain, and where the best opportunities are for sustained profitable growth. The world has changed and those who are quickest to adapt and react will seize the day.
By the way, I believe the farmer in the 1900-era math question receives $ 0.935 per bushel for their wheat!