Best Practices, Feature, Operations, V10I2

Cash Flow and Profit Margins

(Photo courtesy of Karolina Grabowska on Pexels)

Maintaining a healthy profit margin can be a tough nut to crack for the average shed manufacturer, hauler, or retailer. 

When business is good, they’re far too busy serving clients to spend time crunching the numbers.  

Unfortunately, that’s precisely when cash flow and profit margins can dwindle. 

Charles “Chuck” Robinson, special projects manager at Foundation Bank and former owner of Genesis Portable Buildings in Paris, Tennessee, says cash is king, and the biggest constraint to cash flow is rapid growth. 

Nevertheless, maintaining good cash flow is essential for the shed business owner. 

“Growth takes capital,” says Robinson. “As sales growth continues, you can rapidly develop a cash deficit in your business. 

“Compounding the problem are delays in accounts receivables. Then, you suddenly realize you need more money for materials and there’s no available cash on hand.” 

Of course, a decrease in sales can be equally impactful to cash flow. Other pitfalls include interest rate increases, inflation, too much inventory, and inventory shrinkage. 

Robinson, who often lends to shed haulers and manufacturers, says profitability and earnings potential are the most significant factors when approving, or denying, a loan. 

From a profit standpoint, there needs to be enough to carry them forward. 

“I would like to see a shed business owner with at least a double-digit (percentage) net profit before tax if they can get there,” Robinson says. 

“Most of the time, I’ll see profit margins in the teens (percentage), and good operators can get into the low 20s.”

As a hedge against diminishing profits, owners should pay close attention to their current and expected future costs, and then adequately factor that into their pricing. 

Expenses such as insurance premiums, future equipment costs, and increases in fuel costs are often overlooked, resulting in an unrealistic pricing structure.

James Izzo, a Lewisburg, Pennsylvania-based client services representative at Gehman Accounting, says his company helps business owners make sense of their numbers, especially in understanding job costing, the distribution of overhead, and how it applies to their bottom lines.

Many times, a struggling company in the shed market will contact Gehman for help in maintaining a sustainable profit. 

“We suggest that shed business owners spend about 10 percent of their time on their numbers if they want to be successful,” Izzo shares, “but that typically doesn’t happen. It’s usually an afterthought and they get into trouble. That’s where our team steps in. 

“We start diagnosing the numbers like a doctor, and we dig deep into the numbers and find things the owner probably wouldn’t have found on their own.” 

The Gehman team then maps out a game plan for resolving the problem. 

Ken Nisly, a Gehman Accounting business advisor based in Due West, South Carolina, says inadequate job costing is a big stumbling block for many shed business owners. 

He worked for 20 years in the construction industry before moving into a business advisory capacity some nine years ago. 

“Job costing is at the core of what we do,” Nisly says. “Seventy percent of a company’s product might be good, but 30 percent might be leeching money. We find where that’s happening and help them fix it. 

“When you do that, you can quickly take a company from average to excellent.”

Each product or job should carry its share of a company’s overall overhead and make a profitable contribution to the business. 

“The most common thing we encounter is a company or business that does not know how, or is incorrectly applying, its overhead to a job or product,” Nisly adds. 

“In our business, it is common to find errors in this step when people attempt to calculate job costing with their accounting software.” 

In a nutshell, job costing ensures accuracy when pricing a job or product. 

“We first subtract all the raw materials, supplies, and any other direct costs an owner might have had for a job or product,” Nisly says. 

“The remaining amount is their gross profit margin (GPM), both in dollars and as a percentage of sales for that job or product.”

They then apply the company’s overhead burden for an entire year (minus direct labor). 

“This captures every cent the company has in expenses,” says Nisly. 

The gross profit of a job is then multiplied by the overhead burden, and direct labor is added for each job or product. Subtracting the resulting total from the gross profit margin provides the true profit.

Tristan Nelson, operations manager and part owner of Nelson’s Buildings in Gainesville, Florida, agrees that incorrectly accounting for costs is a significant problem for many owners, particularly when it results in insufficiently priced products or services. 

“You’ve got to factor in things such as insurance, fuel, card fees, payroll, equipment costs, etc.,” Nelson says. “You also want to pay attention to the futures market as well and what your costs might be going forward.”

Several pitfalls can adversely impact an owner’s profitability. Nelson says a failure to re-invest in the business can turn into a costly mistake down the road. 

“Put simply, don’t overspend,” he adds. “A rainy day will eventually come when that Mule you’re running has 6,000 hours on it and will need to be replaced. 

“You want that money to go back into the company and be willing to re-invest instead of spending the money on yourself.”

Keeping debt to a minimum is also imperative since debt can have a serious impact on cash flow. Staying on top of accounts receivable is equally important. 

Robert Hill, owner of The Shed Mover, a Virginia-based hauler, stays profitable by keeping his debt to a minimum, primarily by using well-maintained, older equipment. 

He has 25 years of experience in the moving, hauling, and leveling of portable storage sheds and structures.  

“Insurance, fuel, blocks, and maintenance costs are about as much as I want to incur (in expenses),” Hill says. “I could not make it if I was paying a truck note or had loans for a Mule and/or trailer.” 

It’s a part-time effort for him, as he does mostly private moves for customers wanting to move a shed to a new home or relocate on the same property. Nonetheless, Hill says he remains very business-like. 

Nelson says his company is mostly “cash-based.” He also negotiates discounts with suppliers and buys materials in bulk for his inventory of carports, steel buildings, gazebos, greenhouses, pump houses, and pole barns. 

They’ll order from three to four truckloads per week, each carrying enough material for two to six sheds. 

By purchasing the inventory, Nelson’s Buildings can better control its profit margin. 

“Being cash-based, you’re not impacted as much by inflation,” Nelson says. “You can also set your price. When the manufacturer owns the inventory for you, you basically have less control over things. You’re at their mercy.”

He admits there are certain drawbacks to the cash-based manner of doing business. 

“If your inventory is damaged and you have to repair it yourself, that turns into an unexpected expense,” Nelson says. “You’re also more on your own when it comes to deliveries, and you have to have specialized machinery to deliver the sheds.” 

Additionally, the inventory can depreciate should it sit for long periods on the lot during an unexpected market downturn. 

Nelson’s Buildings has an in-house accountant but outsources much of the financial advisory aspects of the business. 

“We also use a product that we created, Sales Advantage, which we plan to offer throughout the country to shed dealerships,” adds Nelson. 

“It constantly tracks and eliminates any pricing errors at our various lots. If used properly, it can double your output.”

Foundation Bank’s Robinson says there’s some good news for the shed business owner—most businesses should expect to maintain a healthy profit in today’s business environment if they properly manage cash flow and costs. 

In fact, much of the shed industry continues to enjoy good returns

“If they keep generating sales, most owners can benefit from healthy profits relative to other industries,” Robinson adds. 

“When they hit certain benchmarks, everybody’s making money.”

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