Columnists, Thom Finn, V3I3

Profit Per Unit

Earlier this week a client asked for help sorting out and prioritizing a list of nearly 30 projects and tasks that were competing for his attention. The list of ideas, tasks, and actions to take was growing so large that anyone would get overwhelmed. He wisely used his investment in me to take part of the session to review everything and to help prioritize.

When finished, he had a manageable stack of a few items in the priority one column, a larger list of the things that were priority two, and an even bigger stack that represented priority three. Knowing what was currently most important in his business plan made
this job pretty simple.

I like looking for root problems and those actions that, if completed, will make everything else easier or not even necessary. The One Thing by Gary Keller is a fun read on this topic.

These days, most business owners have more things to do than there are available hours in a day. I have long subscribed to, and recommend, the business philosophy of “first things first” when deciding what to work on.

In my humble opinion, there is nothing more foundational than knowing the profit per transaction in the shed industry. If you have poor profit per transaction margins (or worse yet, don’t know what they are), all of the sales, marketing, efficiencies, lean strategies, incentive plans, websites, branding, and team building are a waste of time and energy. These activities are like putting lipstick on a pig. I suppose the pig is prettier with the lipstick, but it’s still a pig.

Knowing your profit per transaction requires a detailed analysis of all the costs that go into each structure you make. I call it job costing when explaining it to clients in the construction industry. When I’m coaching my shed builders, I explain it as cost per transaction or cost per unit. In other industries, it could be referred to as cost per transaction.

All of these definitions have the same goal: determining the dollar value and percentage of profit left over after all of the costs are subtracted from the total selling retail price.

Have you ever done something so long that it has become an ingrained habit for you? And when you come across someone who’s not doing it, you have difficulty wrapping your head around why they’re not? That’s my temptation with managers who don’t do job costing.

It has become second nature to me (and hopefully my clients) that when I first start talking with a builder on the subject of improved profitability and I ask what kind of margins they run on each product, I am horrified for them if they do not know these numbers. There is a small percentage who have a general idea, but not to the level of detail that I recommend knowing your cost per unit.

The builder who knows his profitability per shed knows where his business stands. I will take that over having to wait for the reports from accountants six weeks after the month has closed to get the verdict on whether or not they had a profitable month. Performing a profit per unit analysis tells you within eight minutes of a shed’s completion how much profit you made on it. For those using a weekly incentive bonus plan, a summary of sheds completed in a week can double as your job costing scorecard.

A successful shed builder in the Midwest recently decided against opening up another retail location based upon expected sales because his findings from his own profitability per unit analysis showed it would be a risky move.

The profit per unit summary sheet also indicates which of your products are winners and which are losers. Most builders are surprised to see which buildings are actually losers. Either the percentage is too low, or worse, a percentage is a negative number. And if you are building 100 of these models a year, losing as little as $2 on each should solve the riddle of “why is my business not profitable?” You will also uncover the differences in profitability between a 10 by 12 and a 10 by 16.

Armed with this knowledge, you could be more protective against allowing discounts on your items. A 10 percent decrease in a sale price will result in cutting the profit margin by half, depending on what the results for your profit per building tells you. One builder was annoyed with me when I expressed my glee in seeing he had four losers on his weekly summary sheet.

“Why are you happy that I am building sheds that are losing money?” he asked.

I had to explain that my joy came from his knowledge. I can’t think of any better business advice than knowing your numbers on this level.

Another builder decided he would stop making a certain product altogether. Once he added in the cost of trucking and home delivery, the profitability percentage came close to zero. Better to focus his energy and efforts on not giving a customer that option and demonstrating why a more profitable model would do the same job.

A third shed builder client instituted higher delivery charges to make up for the loss when he delivered sheds further away. All three of these examples of averting disaster have their origins in completing a profit per unit analysis.

As with everything else I try to recommend, job costing, or knowing your cost per unit, is simple, but may not be easy. I break it down into three steps.

Step one is to calculate what your true hourly cost for an employee is. Overtime, benefits, paid days off, and the employer’s portion of payroll taxes all drive these wages up from the dollar amount you pay a worker. Just knowing this individual statistic of your true hourly labor cost is eye-opening by itself.

The second step is to figure the overhead contribution per hour. I have always recommended that builders figure out what amount of each hour must go to overhead. Figuring overhead contribution is taking all your fixed cost (a useful definition of overhead costs is every cost except for labor and material) divided by the number of hours you spent in production. This is your overhead per hour. Doing it over a full year will cover all your fixed expenses.

Sometimes this analysis right here tells me the root problem of poor profitability. Most shed builders have a normal range of overhead per each production hour. If the number is higher than that average, you probably have more fat than the rest of the builders do.

The third step is to subtract these two numbers along with your actual material cost from the selling price of the shed. Then, you will get a true net profit dollar amount on this unit and be able to easily calculate the percentage of profit and a third measurement. A favorite measurement of mine is the net profit per man-hour. If a business faces excessive demand, knowing what products bring the highest net profit per hour is the best way to maximize profit yield during busier times.

I encourage clients by telling them they will only have to do this process once a year. This year could be different, as everyone is waiting to see what lumber prices will do in the future. If there is a drastic increase, and the cost of new lumber purchases goes up, some slight refiguring is needed to get a more accurate profit percentage with this higher material cost.

Job costing, or net profit per unit analysis, is an ideal winter project. It should be done before you complete a yearly price list. If you have already completed a yearly price list, depending upon how painful the losses or poor performers are, you should consider adjusting your prices. I coach folks to compile individual costings into a one-page summary.

At this step of the analysis, simply learn and apply. What do you see in the results? What is the rhyme or reason some products are more profitable than others? After this learning, I insist that you apply your learning. You have come this far in analyzing your profit, now dig a little deeper into your reserve of grit and finish the exercise by coming up with three points of action you will take to either maximize your winners, or stop/reduce the bleeding from your losers.

When one builder learned he was losing profit points when he added a certain option, he solved this by raising the price of this option to make the overall product a winner.

A second client learned that sheds going to one of his resellers were consistently some of his least profitable items. The action item I held him accountable to was discussing his expectations on limiting the discounts from this sales lot, which brought the numbers back in line.

A third builder realized that his team needed training so they could be more efficient in making certain types of roofs. He had always suspected this was a weak link with his team, but he did not understand the full damage until he saw these losers on his job costing summary


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