3. Bad Business Decisions

A business decision made by any person working in your company must be an informed decision based on the experience and savvy of the person, and the decision needs to include the following four points before acting upon. The absence of any of these four points will undermine the probability of a positive result and ultimately create “anarchy” in the business decision making process, because each person will incorporate their own standards of what “good” is to them. The four points are:

Support the company’s stated goals of profit and sales growth. Whether at the level of the job estimate, service contract, engineering budget, design budget or service call, all employees who make decisions must consider whether or not this intended action will move the company closer to achieving their stated revenue and profit goals as understood at the level of the person making the decision. The absence of this step creates a separate little business within your company, run by each person who doesn’t follow this step. You do not want your financial life created by the uninformed decisions of others!

Be consistent with the “customer promise” of the business. At each level of “customer touch” within your company, each person must know the specific commitments made to the customer. The promise should be written and presented to the customer so that “pictures” or “expectations” are commonly agreed upon and communicated throughout the organization that interacts with the customer. Time/schedule, change orders, follow-up, written communications processes, payment terms, warranty, and intended results should be known and reinforced at each level, with the practical input of each level of employee customer interaction. The promise is simply the agreed upon standard you set with the customer. If the customer perceives it to be different, depending with whom they interact, you can be assured of a problem impacting your revenue, profit, and reputation.
Be consistent with concepts of teamwork and inter-departmental “customer”. Be sure that the decisions you intend to make include the resulting impact upon the other departments affected by the decision. Get their input. The decision may be good for one area and not for another. The ‘bottom line” on this one is, don’t “kill” someone critical to your business by not letting them know what you are about to do.

Ensure that the decision or action meet “compliance” or regulatory requirements of your industry, federal tax code, and state and local standards. This may seem like common sense, however, the issue is to prevent not knowing a potential problem with some regulatory body. Simply get a sanity check where appropriate, within the company. Whether it has to do with taxes, or the hiring of a fake-documented (for workman’s compensation insurance) subcontractor, or illegal aliens, or local/state regulations, simply ask the question to someone who should know the answer. Do not accept “I don’t know” for an answer.

Your reports and schedules, when understood and responded to, are precious to keeping your profit. They represent the financial control of your business. You need to use your balance sheet, income statement, working capital schedule and your schedule of estimated cost to complete jobs in progress as a sanity check against your field review, office feedback, job cost reports, project notes and other weekly and monthly schedules.

By understanding how to effectively manage from our financial and job cost information, we permanently increased our gross profits by 20 points and increased our sales by another 20%.

David Newton, President, XYLEM Builders, Weymouth, MA

The problem for many smaller and mid-market companies in the construction industry is that they are often misunderstood or ignored because their reports and schedules are not trusted to be accurate. They are often not accurate because the reports are used primarily as a tool for the accountant to prepare a tax return or to fulfill a bank-reporting obligation, so they do not contain complete enough information for you to control your business.

Let’s go backwards. Let me explain the purpose and value of a “Balance Sheet” and an “Income Statement”.

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We are happy to announce that several of my articles have been published by nationally know publications. “How to Read Your Financials”, was published in the September issue of Construction Business Owners Magazine and “Don’t Be Fooled By Your Job Cost Reports”, was published in the Sept/Oct issue of Florida HomeBuilder magazine, the official publication of the Florida Home Builders Association. Also this month, I am a guest columnist in the Florida Homebuilders Association website where my “Management” column article is posted and entitled “How To Make Your Employees Accountable”.

It was a pleasure to present two workshops on August 15th and 16th, 2007, in Long Island, NY, to two separate groups from Vistage International, the world’s largest CEO Membership Organization that specializes in executive leadership development, CEO coaching and business coaching. One presentation was entitled “Succession Planning” and the other, “Seven Deadly Mistakes Businesses Make…How to Recognize, Quantify and Avoid Them”, both of which were successfully received and well-noted by all attendees, who were prominent executives, businessmen and speakers in their own right. I am available to offer workshops or presentations at seminars, trade shows, special meetings and events. If you know of a speaking opportunity that might be a good fit, or would like to know more about my presentations and availability, please contact me.

Just a heads up for our Florida relationships. Keep in mind for your pricing, costing, profit planning for next year.  Everything helps!  Tony

Proposed Workers’ Compensation Rate Reduction!

The National Council on Compensation Insurance (NCII) has delivered its annual rate filing recommendation to the Florida Office of Insurance Regulation (OIR).

Based upon its review of the most recent data available, NCCI has proposed an overall rate level decrease of 16.5%, effective January 1, 2008.  If approved, it will be the fifth consecutive drop – a cumulative overall statewide average rate decrease of 50.4 percent.

The previous rate reductions approved by the OIR are as follows:

• 10/1/03 (-14.0%)
• 1/1/05 (-5.1%)
• 1/1/06 (-13.5%)
• 1/1/07 (-15.7%)

Assuming the filing is approved as proposed, the overall average rate impact at an industry level would be as follows:

The OIR is expected to schedule a public rate hearing in October,

On the heels of the my last speaking event (see previous post), I have been invited to speak to the NE region member’s group of  Vistage International, the world’s largest CEO Membership Organization, specializing in executive leadership development, CEO coaching and business coaching.

On August 16th I will be presenting one of the same presentations I gave at the SEBC, “Seven Deadly Mistakes Businesses Make…How to Recognize, Quantify and Avoid Them.” I will demonstrate how poor fundamental financial controls, poor cash management and misunderstanding of financial information can kill businesses. I will be explaining how to avoid those deadly mistakes to gain a protected business, higher profits and increased revenue in this executive, members only, business enhancing workshop.

I thought I would take this opportunity to talk about my experience at the SEBC (Southeast Builders Conference). I presented two well-received workshops on July 14th in Orlando, FL to the attendees of the annual SEBC. The Florida Home Builders Association-sponsored event drew a large construction business-owner audience. And I had an equally sizable audience at each of my two workshops: “Seven Deadly Mistakes Businesses Make…How to Recognize, Quantify and Avoid Them” and “Succession Planning: What, When, Why and How“. In both I explained how to improve construction businesses and I believe I was really able to make an impact on the personal lives of the attendees by showing them how to grow their business, improve their profit, increase their revenue and protect their businesses and families with his practical expertise and guidelines.

If you didn’t have an opportunity to watch the presentations, or would like to know more about what was discussed please feel free to contact me.

Create Trust in the Workplace, Efficiency,
Greater Profit and a Culture of Performance.

Whenever our firm is implementing change in an organization, we emphasize to the executive and middle managers that truth telling and truth facing will be the hallmark of our process. If the people with whom you are working can’t trust that you’ll tell the truth, you can’t get commitment, and when you make commitment, you build hope…when you keep that commitment, you build trust, when you have trust and commitment, you get ownership of the work performed and results!. Respect guides you to tell the truth and adds momentum to doing the right things well. If you can’t establish respect, you can’t get trust. If there is no trust, there is no commitment. If there is no commitment, results are poor and time is wasted. Having said all that, simply by listening and responding respectfully to an employee and encouraging their input, all else becomes possible.

It is difficult for most to embrace changes in the way things need to be done. Business owners are naturally concerned about changes to the way the business got to where it is now. They wonder, “Will key personnel quit? What about the cost? Will it really make us better?” Thus, for our firm, we establish trust as an immediate goal. We establish trust by delivering the results intended and by accomplishing what we were hired to do on time and within budget. To establish loyalty to both the company and to the process, we always seek to acknowledge the contribution of others and promote it, both in front of them and in a public forum. Problems are discussed in private, yet we expect that “pride” will not get in the way of a manager or executive apologizing to the targeted parties and doing the obvious “right thing” when an obvious “wrong action” has been done.

Finally, don’t blame someone else when things go wrong. Demonstrate your own accountability to the commitments made to the company. “Step up”, listen completely, ask questions, clarify employee communications, make commitments, accomplish commitments, treat co-workers with respect and be completely honest in communications. As a result, you will not only “get what you measure”, but you will find a defined process for positive change, and you will create a powerful workplace, greater profits and increased revenues.

Nearly 10% of all the companies that I have personally worked with over the past 35 years describe themselves as “Christian Based”. The Christian based companies have an exceptional acknowledgment of Jesus in their daily lives, love of the Bible, and they believe in the power of prayer. They read from the Bible either at home or at the office and often with their employees. Many begin each meeting with prayer. Everyone I have met in the Christian based companies are wonderful, consistent people who care deeply about their faith, their customers, their family and their employees.

The nature of my business, the Burruano Group, consists of defining and implementing corrections to problems involving employee accountability, profit, compensation and revenue. During the course of my work, I have discovered that each one of the Christian based companies experiences the same problems common to every other company we have worked with over the years, Christian based or not.

One of the unique challenges I have encountered in working with this group is that when they have an over dependence on prayer and family ties, they become paralyzed. They are unable to take “ACTION”. As I’ve said to each of them, “You were already successful or you wouldn’t be in a position to retain our current firm. You have been given a blessing in the continued existence of your business. Realize that many businesses fail early on, yet you have made it this far!”

What they often forget is the charge in the Bible to “Stewardship”, which is a responsibility to take the gift you have received, use it and act upon it. Neither prayer alone, nor love of family and employees alone, “gets it done” in the business world or in life.

Acting with discipline, accountability and standards, and moving forward to implement your desired and achievable results, coupled with a faith based culture in your organization, “gets it done”. Accept your responsibility as a “Steward” to act and use the gift you’ve been given by God.

Many construction companies utilized their own equipment in the execution of their contracts. They’ve made a determination that there is sufficient potential utilization that ownership is better than renting for a job for various economic and efficiency reasons. They use the market rental rate or an internally determined rental rate within their bids. Once the job commences, many contractors do not account within their job costing for this equipment. The effect is to overstate profit during the ongoing job review or at the end of the job, since costs within the bid are not considered on the job cost. Thus, the contractor can overrun labor hours and cost, overrun materials or subcontracted costs, and this is offset by the zero equipment cost posted.

The same situation occurs when a computed labor rate is used in the bid. More often than not, the labor rate exceeds the actual labor rate, and the effect is the same overstatement of profit. Buy out gain of materials or subcontractors post bid award, again has the same effect.

There should be posted to the job an internal rate of rental by day, week, or month as is applicable. This should be compared routinely to the expenses of repairs, parts, useful life depreciation, interest on the equipment loans, and possibly fuel and any other costs of the operation. This is a profit center, or the contractor would never have purchased the equipment in lieu of renting. It’s simply another means of profit in your business.

Buy out gains on materials, equipment, or subcontractors should be tracked and reviewed for the same reasons and the net buy out should be entered into your job costing system as the “estimate” if your system does accommodate an area for buy out gain.

Labor rate variances of bid rate to actual are often 10% or higher or more. Buy out gains can range from 1% to over 5%. Depending on how much of your own equipment makes of the bid, it can vary the results by 2% to 15% or more. When you add these up, it can create a false ongoing review of the job, then when you review your financial statements, you haven’t earned as much as you thought. Contractors lose confidence in the financials and assume it’s just errors or accountant’s tax moves, and the financial problems on the job are not identified specifically, not addressed, and they simply persist leaving tens of thousands to hundreds of thousands of dollars lost by simply not knowing what is occurring because it’s masked by these other profit centers (equipment, buy out, labor rate).

A simple analysis of your completed jobs compared to estimates, coupled with a financial statement presentation that mirrors the components of your cost of jobs estimated can be accomplished by a knowledgeable construction financial person. If they don’t understand this, change the internal or external accountant.