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Overview
Product Details
| ISBN-13: | 9780867187038 |
|---|---|
| Publisher: | National Association of Home Builders |
| Publication date: | 06/01/2006 |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 160 |
| File size: | 7 MB |
About the Author
Read an Excerpt
CHAPTER 1
Understanding the Critical Number in an Estimate — Profit
Although every business has some commonalities — a registered name, a checking account, contracts, and deposit slips — the likenesses fade with the personalities and skill sets of the owners. Each small business reflects the skills and personalities of the owner. Some of these business-focused entities will flourish and generate a lifetime of income for their owners and employees. Other business owners will toil job to job for decades never quite knowing why they are not doing better. What is the difference between the two outcomes? Some owners run a business and have or buy technical knowledge for field work. Others have deep and perfected technical knowledge and find fulfillment in the production of work. A blend of both business and technical skills is likely to provide a productive balance that leads to stable companies.
Defensive Estimating directs its content to both groups. The first group will renew their vigilance in improving their bottom lines, and the second group will be reminded that a company is constructed of business systems, not simply a series of jobs. Builders, remodelers, and trade contractors already directing a successful and profitable business will find value in this book as they recommit to keeping a profit-centered outlook.
Throughout the book, the terms builder, remodeler, or trade contractor are generally interchangeable. Business success in general depends on planning for profit and defending its creation. To that end, any business organization could use the concepts in this book by substituting their attributes for the general concepts promoted here. The local retailer, grocer, restaurateur, or newspaper publisher — any of these people could refocus their firms away from gross sales as a measurement of success to the production and defense of net profits.
Defensive Estimating provides a profitcentered way to think about estimating. It presents a series of techniques that will sharpen your defensive skills in the quest to protect profits. These techniques will help you assemble pricing and develop personal skills in a way that defends your projections of profit. This book is not an estimating database with prices for thousands of items. It is not a software program into which you punch a few numbers and generate a plentiful array of proposal language and a magically created bottom line figure to present to a customer.
When your estimates are not focused on a contribution to the annual budget (through protection of profit), by default, the estimate becomes a step in the quest to acquire work. Work alone is not a satisfactory goal for a company. Work can be unprofitable, cyclical, and risky. Profit on the other hand is bankable and, if managed conservatively, secure.
The planning process for the creation of profits should reflect the companies' need to generate income. Chapter 3, "Establishing the Profit Number," will cover this topic in depth. Some companies are profitable because of the intellectual strength of the management team, and in others profit results from the hard work of the field team. Consistent profits should result from a solid plan that is well-executed at every level (Figure 1.1). Profit should be the reward for good planning and tireless management. Profits can vaporize with a contract error, an estimating mistake, or an unforeseen (and unprotected) action of a third party.
Work Flow
A clear work flow in estimating is repetitive and logical. The basic steps shown in the diagram in Figure 1.2 are data collection, assembly and estimate, customer approval, data handoff to production, review estimate versus actual costs, and update your pricing database.
Being able to look at estimating as a process is a fundamental step in mastering the skill of estimating. Getting the numbers of "sticks and bricks" only can be devastating to profits because it is neither a process nor inclusive of all the activities required to build a job. The estimating work flow in Figure 1.2 is a process that repeats for every job. If the builder or remodeler estimated the costs and missed the activity of data collection from a site visit, the omissions could be devastating. Some builders and remodelers may try to put numbers to paper without collecting all the specifications. This practice may be fine for an early budget discussion, but it will hardly suffice for an outline of a profitable job. Systems thinking is the format that can take any business to a heightened awareness of processes. If you identify the repetitive steps while you constantly improve the process, the likelihood of consistent results in business goes up.
Plenty of jobs are sold without fully defining the scope of work. Unless a change order covers the difference, the builder or remodeler later has to pay with the profit line item for a customer's delayed clarification of what the customer thought he or she wanted. A defenseless line item puts profits in danger. This workflow starts with a prequalified customer. Chapter 7, "Minimizing the Workload," explores how to do fewer estimates and still remain fully engaged and profitable.
Everyone doing estimates has a process. Once you outline the steps in your process, you will probably
* improve the workflow by eliminating redundant steps
* reassign portions of the information-gathering to others
* use the freshest technology to gather data and put it in place
You can now professionally assemble the estimate. Steps in the process are clear, the methodology logical, and the outcomes well defined.
Estimating is a game of business activity. Profit is the king of the board, and you must protect it. The contents of this entire book focus on the creation and defense of profits. The concepts should help you rethink how you approach estimating. The strategies should shape your customer and supplier relationships. Chapters 8–10 cover materials tracking, production tracking, and financial analysis as they relate to estimating. A number of contract strategies in Chapter 11defend the estimated profit from the signed contract throughout the rest of the job. Finally, the profitable results of a logical and well-executed estimate for a building or remodeling job can change your life because a continuum of positive cash flow can come your way (Figure 1.3).
Defining a Professional
A professional is someone who works on his or her business, not just in it. Many tradespeople embark upon getting their own work and having their names on their trucks. Yes, they each own a company, but they may not own a business. A company is merely a legal entity, and ownership can be as simple as registering a trade name and paying a small registration fee. However, a business implies a series of processes leading to the creation of profits. A business needs customers, marketing to find those customers, sales, and a product or services. It strives to improve systems, minimize costs, and maximize profits. Management of these processes is the key to making a company into a business. An owner must work on the business or hire someone who will. Having a lifetime of work without working on the business is like having a job without a boss. Would you really want to work for a company
* that has nobody working on business processes?
* in which nobody is working on evaluation or measurement of activities?
* in which nobody is working on getting the most out of the company?
* with no boss?
No one should, but many do.
Establishing the Overview
Where is your business taking you?
A solid business should enable the owner and employees to achieve any number of life's goals (Figure 1.4). A more common perspective makes the end goal the act of business ownership alone. Infomercials often harp on this idea: "Own your own business!" This common perspective can surely limit your experiences in life and lead to a fixation on the business without personal growth. To the extent possible, you should form a business to help you achieve your hopes and dreams for your life (Figure 1.5). The benefit of building a company to support a lifestyle is that you can specify the degree of each that you can manage. A lifestyle and business can be mutually supportive. In order for them to do so, however, you need to connect the dots of your goals and how your daily activities support achieving your goals. You will see the estimating connection shortly in Chapter 2, "Establishing the Profit Number."
If a company's role is to support a lifestyle, you must define this lifestyle and how much you will need to pay for it (Figure 1.6). A company may be a stand-alone legal entity, but its burden is to return income to its owner or shareholders as profits.
Building a company that fulfills your life's expectations is indeed empowering. Your company must rely on the production of profits to fund a personal budget and lifestyle.
CHAPTER 2Establish the Company Profit Number Based on Your Income Needs
The company profit number should not be a vaporous goal of "I want to make all I can!" This goal is not attainable because it includes no number. You would simply never get there. The number you set out to earn should be indexed to what it costs you to live. Surely you need to earn that amount for sustenance and 50% more for savings, growth, market fluctuations, and other contingencies.
Establish Your Income Needs: Set a Personal Budget
When a speaker asks seminar attendees, "How many of you have a personal budget?" the response is regularly less than 10%. The number of attendees who confirm the existence of a company budget is only slightly higher. Creating and managing your personal finances is a significant personal step. If you can't quantify, manage, and be accountable for yourself financially, you are unlikely to do so for a vaporous entity such as your company. Tying the company performance to the fulfillment of personal financial needs is critical to overall success.
A planning exercise of quantifying personal needs provides the foundation for driving the company you develop to support your needs. Initially, entrepreneurial builders and remodelers will often state that they want to make "as much as they can" from their work. Others might describe a lifestyle without establishing those lifestyle costs. Also, some builders and remodelers might describe their interest in creating financial security without specifying a cost for that desired level of security. All these answers beg the question, "How much is that?" The answer lies in your ability to estimate for personal consumption and then live within that number. This estimating challenge resembles creating a job cost estimate and delivering it on budget, so a personal budget also is a target for spending that you need to adhere to with dedication.
Estimating is a process, and it works well beyond construction costs. Without estimating and managing your personal expenses, to index your company's income to your personal expenses would be impossible. These two items are related and need to be managed to keep the relationship proportionate. Generating a company budget that produces a minimum of 150% of the owner's personal expense needs allows a 50% excess for personal and business growth or the security of increased savings to enhance your net worth. If you look at net income before owner's compensation, whether draws, salary, hourly, or commission, you have a number you can use and compare with any company regardless of whether the firm is an S or C corporation, a limited liability corporation (LLC), a partnership, or a sole proprietor. The company doesn't pay the owner's personal expenses, but it must provide for them and have net profit of its own to fuel growth and protect against rainy days.
If you maintain a firm grip on personal expenses and a have a proven track record of staying on budget, please skip the balance of this foundational chapter and move to Chapter 3, "Competencies," and beyond to build estimates that produce profits that fulfill your personal needs. If you are curious or do not have a personal budget within your grasp, hang on for a few more pages. I will review the basics and set the stage for a relationship between income from your company and personal expenses.
Some discussion takes place in our collective youth about personal budgeting. Whether at home, at school, or through self-discovery, learning about the balance of income and expenses takes place. The United States bankruptcy rate is currently at about 0.5% of the population per year. This figure shows that not everyone has learned the lesson or has been able to manage the risks. The U.S. Department of Commerce calculates the national savings rate to be 0.2%. This percentage provides further evidence that more attention could be paid to balancing income and expenses. Many retirees are counting heavily on social security benefits to supplement retirement because they may not have saved enough along the way. Your company needs to not only pay the current expenses for the firm, but it also needs to generate enough money to pay your personal expenses and contribute to your savings.
The income from a building or remodeling business is active income, income that you derive from the labors of your work. Along the way you should use this active income to pursue passive income, income you derive from your investments in the labor of others. Passive income can come from stocks, bonds, real estate, or any other investment that can produce a continual stream of ongoing funds. Creating passive income should be a business proposition in itself.
The core work of business is initially to create active income, stabilize its flow, and minimize the risk to its ongoing production of future dollars. As a business (and its owner) matures, the owner must spend some time creating passive income lest the owner toil away at churning income against expenses without creating the financial security of a passive income stream. Passive income has a series of advantages over active income:
* It is not subject to self-employment tax.
* It can be tax exempt if you invest it in tax-free instruments.
* Equity is not subject to tax.
* Income increases annually through compounding or escalation.
* Payment of mortgage principal provides forced savings.
* Asset value rises with inflation.
Active income, on which business owners consistently focus, has a different set of attributes. A blend of both endeavors is indeed desirable. Active income is
* cyclical
* fully taxable
* subject to self-employment tax
* subject to income tax
The chart in Figure 2.1 plots the passive income line against active income and personal expenses. You not only, especially need to understand the personal expenses line, but you also need to control it over time. Surely spikes in spending occur for needs for health reasons or college expenses, but you can anticipate and plan for some of these through specific savings or insurance plans. The active income line results from your building or remodeling endeavors and, like expenses, you need to manage it for incremental growth. You should be able to project some increases in active income and work toward their realization. The line for income is intentionally plotted with a slightly higher rate (5%) of increase than the expenses line (4%). This small divergence over time has a big impact on the compounding of net worth and generation of passive income.
The actual numbers in the chart in Figure 2.1 are meant only for illustrative purposes. What is interesting in these growth curves is that the active income and expense lines are generally incremental or linear. The passive income line is a parabola, or curve, because of compounding and divergence of the income and the expense lines. These lines can be bent sharply depending upon the growth in your active business or the constraints on spending.
The difference in income versus spending is the only modifier of the passive curve initially. The amount of risk and rate of return in passive income is the second modifier. A high-risk passive investment compounded over time surely has a dramatically, differently shaped curve for passive income. In the later years, the spread between active income and expenses gets larger and allows for a faster investment in a passive stream. The passive income curve accommodates the additional savings and also the compounding of the underlying assets. The one magical point on this chart is where the passive income curve intersects with the personal expenses line; this juncture is the turning point in financial freedom (Figure 2.2).
Moving forward over time, this circled point shows sufficient passive income to support the planned personal expenses. After this point, you can soften the active income line by not working as many hours or by committing time to other activities while still meeting your basic needs. Financial freedomcan have a life-changing impact on a small-volume business owner who has managed with active income for years.
(Continues…)
Excerpted from "Defensive Estimating"
by .
Copyright © 2006 BuilderBooks.
Excerpted by permission of National Association of Home Builders.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
LIST OF ILLUSTRATIONS,
ACKNOWLEDGMENTS,
ABOUT THE AUTHOR,
FOREWORD,
PREFACE,
1 Understanding the Critical Number in an Estimate — Profit,
2 Establish the Company Profit Number Based on Your Income Needs,
3 Competencies for Building and Remodeling Success--Estimating,
4 Spreadsheet Estimating,
5 Seven Ways to Get the Numbers,
6 Using Retail Pricing at Every Line,
7 Minimizing the Workload,
8 Materials Costs and Tracking,
9 Estimating and Tracking Production,
10 Financial Analysis: Estimating the Cash Flow,
11 Defending the Profit Line in Your Building Estimate,
12 Defending the Profit Line in Your Remodeling Estimate,
NOTES,
SELECTED BIBLIOGRAPHY,