Prevent Margin Erosion
You probably know the margin we achieve on a completed job is invariably less than the margin we expected on quoting.
“The margin we achieve on a completed job is invariably less than the margin we anticipated on quoting.”
I have just described margin erosion, a phenomenon that negatively impacts the profitability of every flooring business. In my experience, erosion is around two percentage points. So, if our average margin on quotes is 30%, our average margin on completed jobs will drop to 28%. It might not sound like much, but if we are running a $3m business, it's $60k that has slipped through our fingers annually.
It's generally accepted that our margin only moves down once we win the quote. This article will briefly examine three ways to maintain our margin and four that might increase it between quote and installation.
Manage our installers. Give them a work order showing all the elements of the installation and what you expect them to charge you. When they submit their invoice, our process should include checking to ensure they have charged only what was allowed.
“2% margin erosion might not sound like much, but if we are running a $3m business, it’s $60k that has slipped through our fingers annually.”
Managing extras. Our installers should know that if they incur extras on the job, they have to be approved on the day of the job. You have more chance of recovering a legitimate extra from a customer if you call them while the job is being done than trying to recover it days or weeks down the road. We should have a robust extras process; layers let us know, and we talk to the client and pass those costs on.
Managing error and omission. Not every extra can be passed on to a client. We want to know who on our sales team makes frequent mistakes that shrink our profit. We want to identify which of our installers makes mistakes and costs us money on remediation.
Most flooring dealers do these things to some extent, but if we don’t have access to data, it can be hard to analyse what is causing the margin erosion.
On a more positive note, there are things you can do to increase the difference between the quoted margin and the delivered margin.
“We want to know who amongst our sales team is making frequent mistakes that shrink our profit.”
Build in a buffer to offset erosion. Our business management system should allow us to create an overhead buffer unseen to the salesperson, creating additional profit. Similarly, if we carry stock, we should build a load into the cost of our stock. Of course, we don’t want our salespeople to be uncompetitive in pricing. In my experience, up to 3 or 4% overhead doesn’t impede sales; start small and creep it up. Loads on stocked products can be significantly higher, especially if you have bought well.
Double-check quantities. Before the product is ordered for any project, have someone run their eye over how the job has been planned. It’s amazing how even a small saving in carpet quantity, for example, can significantly boost GP. If we sell a $250.00 carpet, half a meter saved is $125.00 going on our bottom line, along with half a meter of underlay and installation, maybe $170.00 in total. We grow our margin instead of seeing it shrink.
Managing Stock. If our installers have unimpeded access to our warehouse or if we have no controls, some project costs will be unseen—unseen, that is until we do a stocktake and find a deficit. Everything from our warehouse should be subject to a picking ticket generated from customer orders.
Stage jobs. Strictly speaking, this is not a solution to shrinking margins, but it’s an excellent way to manage installations to make them more profitable. If I visit a flooring store in the morning, I will see installers loading up their vans with carpet or vinyl and then grabbing adhesives, underlay, bars, etc., from the storeroom. Staging is where everything the installer needs for the job is bundled for them to pick up, and they take only that.
You might be daunted at implementing some of these suggestions because of the amount of work you think will be needed. Depending on your business management system, you might be right. If you would like to see how RFMS can do these things for you without the grind of manual processes, I would be happy to arrange an online meeting to give you an overview of RFMS.
Chris Ogden is a consultant and Managing Director of RFMS Australasia (RFMSanz.com), a supplier of IT solutions for the flooring industry. Chris has an extensive background in all aspects of the flooring industry, and he can be contacted at cogden@rfmsanz.com.