Direction Magazine - Ask Dave September 2012
The following was published in Direction Magazine.
By Dave Duryee
You keep talking about the fact that moving companies should make at least a six percent net profit margin. I have never made more than four percent and most of the time I struggle in these times to make three. Is this really a realistic goal, and if so, what am I doing wrong?
First of all, let me assure you that a six percent pretax net profit margin (NPM) is very attainable and it does not make any difference the size of your company or where you are located. Highly profitable moving companies across the country are routinely making ten to twelve percent NPM and even higher, both in good times and in bad. Six percent is the minimum that you should attain in my opinion.
There are several concrete steps that you should take to improve your profitability.
I. Laser beam focus on profits
The leaders of highly profitable companies have their eye on profits every day, every week, every month, every quarter and every year. They instill this attitude into their key management and all employees. Their entire staff knows and understands what the projected profit and profit margin is supposed to be and that there will be consequences if it is not attained and rewards if it is. Focus, one of my favorite words.
II. High level of pain tolerance
Effective leaders need to be able to both inflict and receive pain. Sometimes a loyal and dedicated employee who has been with you for a long time has to be let go. They have not performed up to your expectations for years, but you have tolerated it because you both like and respect the person and he or she has been with you for a long time. If you are a second generation owner the employee may even predate your employment. Of course it is painful to let that person go, but it needs to be done. It is the only way that you are going to be able to run a highly successful and profitable company, and it is the only way that you are going to be able to send a clear message to the rest of your employees that poor performance has serious consequences and will not be tolerated. People need to perform, and the longer you tolerate poor performance the worse it gets for all concerned. You want pain? Think about firing a family member who just can’t cut it. That’s pain. How much can you tolerate? How much to do you want to be successful? Where and to whom is your true allegiance?
III. Just say “no” to the busy season
If mostly what you do is haul HHG from May to September, you are doomed to low or marginal profitability. The really prosperous moving companies have long ago realized this and have aggressively diversified into non seasonal services such as Office and Industrial, Special Products, Record Storage, Deliveries and Trade Show Services. They make money every single month while the rest of the one trick ponies dig themselves a deep hole at the beginning of the year, make money for four or five months, and then give up a lot of it at the end of the year. This is not intelligent or rational behavior but if the company has been a HHG hauler for seventy five years, through three generations, that’s what you do. You haul. The faster you change this strategy, the faster you will get to a six percent plus NPM.
IV. Challenge every expense on a monthly basis.
Most business owners that I talk to do not know much of the details of the expenses on their income statements. They tend to look at the top line and the bottom line and if those are sufficient, that’s the end of the analysis. You need to look at every expense, both as an amount and as a percent of revenue. You need to isolate and check your labor ratio (direct wages and owner operator expense divided by services requiring labor) and determine what it should be for your company. This can and should be tracked on a weekly basis. Every expense should be challenged in the budgeting process. What is it for? Do we really need it? How can we minimize it?
V. Carefully scrutinize your gross profit
Gross Profit is defined as Revenue minus Direct Expenses. Direct Expenses are those that are directly responsible for producing revenue, such as direct wages, purchased transportation, vehicle operating expense, packing supplies, rent and depreciation. It is vitally important for you to look at all direct expenses as a percent of revenue and understand what your Gross Profit Margin (GPM) should be in your company. The GPM is calculated by dividing Gross Profit by Revenue, and it is going to vary depending upon your particular mix of business. You should track this carefully and set a proper standard for your company. Any decrease of even one tenth of one percent in your GPM should be analyzed and explained. The Gross Profit Margin is the most important ratio that you can calculate and you should know it cold for your company.
VI. Avoid playing games with your profits
I have had many clients over the years who thought that the most important thing that they could do is show no profit at the end of the year. They use every trick they can think of to avoid making money so that they will pay no income tax. Personal expenses are slid deviously through the company. Multiple companies are set up with different fiscal year ends so that profits can be transferred from one to the other. It is you versus the IRS and may the most creative person win. This type of behavior has very bad consequences for little or no benefit. There are really not any legitimate loopholes available for avoiding taxes, so laws need to be conveniently broken. There are quite a few things that you can do that are against the law but are unlikely to be detected, so what the heck, why not go for it? The problem with this behavior (other than being unethical) is that it sends a clear message to your employees that you do not want to be profitable and that you will even lie and cheat to accomplish that. It reflects poorly on your character and your integrity and harms your ability to run a successful company. It is the wrong game that you should be playing, and if you think that you can behave in this fashion without everyone knowing about it, think again. They know. My advice is to maximize your profits and pay whatever taxes are due. Be squeaky clean and meticulous on following all the rules. Set this type of example in your company and demand it from your employees. You will be much more successful in the long run.
Maximizing your profits and your profit margin is a 24/7 exercise. Never stop thinking about it. Never take your eye off the profit ball. Whenever you see any waste in your company jump on it and make sure that your employees are doing the same thing. Do not tolerate simple things like reusable packing supplies left in the residence. Never shirk from your responsibility to inflict pain. Of course no one enjoys letting someone go, but that is your job. You owe it to the rest of your employees to get rid of those that are not performing so that the company can prosper and they can keep their job. Send the message to your entire staff that you intend to make a lot of money and if you do so will they. If not…….well they won’t either. In fact they may not be an employee at all. Your morale will skyrocket. You will attract winners to your company, people who perform and expect to be held accountable. John Wooden once said that “winners and losers are self determined, but only the winners will admit this.” Think about that. Decide to be a winner, and then do the things required to win.
The bottom line is that all those business owners making six percent profit margins or better are not any smarter than those that are less profitable, they have simply decided to win.