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10 steps to building a multimillion-dollar companyBy Terry Morrill, Owner and General Manager of Pacific Outdoor Living
I started a landscape/hardscape contracting company in 1999. Like many of you, I started out with a small crew, a small truck and a handful of used tools. With my 2 sons, we took the company on a rocket ride to the point where we now gross over $15 million annually and have earned 2 Inc. 500 awards along the way.
Throughout our journey as a company, we have made every mistake in the book. But, we persisted, became experts in the trade, and came out on the other side.
Through our growth, I’ve codified the 10 most important steps to take if your goal is to build a multimillion-dollar construction company. It’s been a tough but very interesting and very rewarding experience working this out over the last 20 years.
There are chapters, if not a full book, that could be written on each one of these steps. For now, let’s look a bit closer at the first 2 steps.
Step 1: Set a goal
Most contractors start a contracting business with NO plans, NO road map and only a vague idea of where they are and where they want to go. A road map would be a step-by-step procedure of how to get to your destination from where you are.
10 steps to build a multimillion-dollar company
- Set a goal.
- Know your numbers.
- Estimate your jobs correctly.
- Hire the right people.
- Build a competent crew.
- Separate your marketing and your sales from production by adding a production manager.
- Effectively market and sell.
- Create an org chart.
- Continue to build a machine, which means more staff.
- Grow and get paid well.
The first step of building a company is deciding what you want to build. This will be a bit different for each contractor, but here’s a destination that most would agree with:
A company that can run without my daily involvement while giving me a 6-figure income. It is something that could be sold or could continue to grow and more importantly, I am no longer in the trenches but am managing others.
However, most contractors never set a goal as above. They might say their goal is to take home $250,000 a year or to make a million dollars. That’s like someone saying their goal is to drive 250 MPH, but leaving out the important part which is to build a car that can drive 250 MPH.
Contractors spend 95% or more of their time running jobs for their customers and 5% on building a company to service their customers. It’s vital that we recognize that these are 2 separate activities.
Being involved in the day-to-day marketing, estimating, selling, installing jobs, handling warranties and all your customer’s needs is not building your company. Building a company is the action of putting an organization, systems, procedures and people in place to perform all the functions that you then manage. Once that is the target, time must be devoted to achieving it.
Any construction project takes time and effort to build. A $100,000 project takes over 1,000 hours of design, planning and construction time. A million-dollar project will take over 10,000 hours.
It's such a simple fact; if you spent no or very little time building a house, you get no house. If you spend no or very little time on building a business, you get no business. If you want to build a great company, you must devote time to it.
Step 2: Know your numbersNumbers are not very sexy, but if you skip this step you are dead in the water! There are 5 vital numbers in any company. You must know what the vital number categories are and you must know what YOUR specific numbers are.
Knowing how the money flows through your business and how much is spent on all the aspects of marketing, selling and delivering your product is VITAL. If you don't know these vital numbers, or what they should be, and have a system to check the numbers, you CANNOT build or run a successful company.
You are in business to make money! So, you need to understand the flow of money, how to control it and how to set up systems that alert you if you are on track or not.
As my company grew, we began running 5, 6 or more jobs going at once, all in different stages. It became very difficult to know if we were making any money at the end of each week or even each month.
I set out to find a system that would tell me at the end of each day if I was making money or not. While digging around I found a major estimating falsehood that was THE fly in the ointment. The problem occurs when you markup materials as a percent of the material cost. That’s because materials are not connected to time only labor is.
A job using a premium paver that costs $1 sf more can be installed in the same number of man-days as a regular paver. A higher materials markup for that job and varying markups for other jobs hurts your ability to judge crew performance and to accurately estimate future jobs.
You should be concerned with how much each man makes the company each day. The only way to determine that is to put all the gross profit on your men. We call this GPMD or Gross Profit per Man Day. With a markup on materials, every job will have a different GPMD. It’s much better to discover how much each man needs to bring back to the company each day and base all your estimates and job management on that.
Once I fixed this, everything fell in place. The system I developed is called AIMM (Am I Making any Money) and starts with the 5 vital numbers and categorizing MONEY correctly.
As you grow your company, you will learn to invest correctly and operate with the 5 Vital Numbers listed below.
|5 vital numbers||example|
|COGS (job cost)||$6,000|
|Gross profit (job profit)||$4,000|
Overhead + Net profit = Gross profit
Gross profit + COGS = Gross income
Gross income is the total money you bring into your company. For example, start with selling something for, say, $10,000. You install the job and finally get paid your $10,000.
COGS stands for Cost of Goods Sold. Think of it as job costs which consist of:
- Labor cost, plus your burden of payroll tax and workers' compensation.
- Material cost plus equipment rental.
- Sales commission.
In our example, your Total COGS are $6,000. You only pay these costs when you have a job. No job, no COGS.
Gross profit is the money that is left over after you complete the job, or $4,000.
Overhead is all your fixed costs that you MUST pay whether you have a job or not. Some Overhead expenses include:
- Your pay as an owner, all production managers' pay, all office pay plus the burden of payroll taxes and workers' comp for management and office staff.
- Rent, utilities and office expenses.
- Insurance – general liability and auto.
- Equipment – lease or purchasing payments.
- Marketing – website costs, mailers, etc.
Think of your overhead as a bin you must fill every week. You fill it with gross profit. At the end of the week, you empty it and fill it again.
You will fail if you design your company to have insufficient overhead such as 10%, as it is not possible to cover all the functions.
Net profit is what is left over each week or month. Set your goal to make a 10% net to start. To continue with our example, let's say you sold, installed and collected on a $10,000 job in one week.
If you want to make 10% or $1,000, your COGS and overhead combined cannot exceed 90%.
If your COGS go to 75% you get this:
|5 vital numbers||example|
|COGS (job cost)||$7,500|
|Gross profit (job profit)||$2,500|
You lost $500! Many contractors zero in on their overhead and try to lower it. But the right next step is to be sure you are ESTIMATING correctly. This is a very bold statement, but there is only ONE way to estimate correctly. After that, you MUST train your crew to deliver your estimate for NO MORE than 60% of what you price a job.
We'll have to save estimating and running crews correctly for another time.
For more information on building a multimillion-dollar company, visit go.PacificOutdoorLiving.com/AIMM-manual/ to download your free copy of the AIMM manual. The AIMM manual is a complete guide to growing your business the right way. Email Terry at gm@AIMMsystem.com
There Is A Proven Formula On How To Build A Profitable Multimillion Construction Trade Company.