Tough Cuts

Hopefully you're one of the fortunate contractors who got off to a quick start this year, enabling you to piece together an accurate budget that's helped you navigate these challenging times thus far. But if you're not, or conditions in your market area have further deteriorated this spring, now's the time to take a hard look at your numbers and start making some adjustments.

"If you are facing pressures from decreased sales, it is imperative that you thoroughly investigate any potential savings that will help maintain your profitability," says consultant and ex-contractor Jon Ewing. "Sometimes making hard cost cutting decisions can be painful. That's why it's very important that you analyze each and every expense."

Start with direct costs

While a handful of overhead expenditures are typically first to get thrown on the chopping block, Ewing says it's important to recognize that significant savings may also be realized by reducing your direct costs. "These are costs that are directly applied to each job," Ewing reminds. "They are costs that can be assigned specifically to a project with a high degree of accuracy."

Direct costs would include the following items on your income statement:
• Direct labor
• Materials
• Payroll taxes
• Labor benefits

Labor is generally your single largest expense. Make sure that everyone on your crews is productive. For example, analyze your costs to spread fertilizer, mow lawns and weed ground cover areas. Then, determine how you can save labor dollars by using slow-release fertilizers to reduce the frequency of fertilizing. Mulching mowers eliminate the need to bag grass clippings and dump green waste. Maybe you can use pre-emergent herbicides to eliminate or minimize weed growth.

"Ultimately, by instituting some form of labor-saving ideas, you may eliminate the need for one crewmember per crew," Ewing points out. "Over the course of several months, that adds up to some serious money."
Materials are another large expense. Ewing is a big fan of having loyal vendors. "You create loyalty by treating suppliers fairly," he says. "Nonetheless, you may be able to improve your purchasing by developing materials lists and offering them to three or four of your most trusted vendors."

For example, you may be able to anticipate your annual fertilizer purchases and attain a better price by illustrating a volume that may be important to a particular vendor. By illustrating the volume you use, it allows your vendor an opportunity to buy cheaper and pass a savings on to you.

Other vendors may offer a 2% net 10-day schedule. If your cash flow allows you to take this type of discount, it can add up to a substantial savings.
More quick tips include:
• If your company freely offers overtime hours, make sure that you monitor them carefully and allow them only with prior approval
• Check-out and check-in company tools
• Protect inventory from theft
• Return all unnecessary inventory
• Make sure documentation is provided for all items returned for credit
• Give crews time off when work is slow and document it for payroll accounting
• Follow your employee handbook policies for vacation pay, sick pay, etc.; don't give away anything you don't have to

Relieve some burden

Once you have fully analyzed your direct costs, it's time to take a look at overhead. Your overhead costs refer to the ongoing expense of operating your business. The term overhead is usually used to group expenses that are necessary to continue the business operations but do not directly generate profit. Overhead expenses as listed on your income statement may include some of the following:
• Administrative salaries
• Advertising/promotions
• Bank charges
• Bad debt
• Dues and subscriptions
• Education
• Employee benefits
• Insurance
• Interest
• Management salaries
• Meeting expenses
• Office expenses
• Professional fees
• Rent or lease expense
• Repairs
• Supplies
• Telephone
• Travel
• Uniforms
• Utilities

While it's true that your people are your biggest asset, it's also true that labor makes up the lion's share of your costs--and that includes indirect administrative and management salaries. "It is important that you evaluate your staff just as you would your material resources," Ewing reminds. "You must analyze every labor dollar to determine that each provides value to your customer."

Building rent and lease expense presents another savings opportunity in today's economy. "It never hurts to ask your landlord for any help he can offer," Ewing says. "Landlords want to keep tenants. Sometimes it costs them more to find new tenants than it does to renegotiate your terms. It's always worth exploring--even if it means you pay more later when work is easier to come by."

Additional overhead savings opportunities include:
• Consult with your insurance agent to look for ways to save on your auto, health, general liability and workers' compensation policies
• Cancel insurance on vehicles and equipment that are not in use
• Look at your phone services - do you really need every cell phone, are they all being used?
• Professional fees such as legal fees and accounting fees should be spent wisely
• If your company uses uniforms, are there ways to save money yet still maintain the image that is important to you?
• Turn off lights and heaters when not in use
• Return idle equipment rentals
• Monitor personal use of company vehicles
• Order inventory supplies only as needed
• Comparative shop for all supplies and services
• Sell idle assets
• Ask your management staff to produce written cost savings plans that eliminate unnecessary expenses in their departments
• Eliminate perks and recognize that cost saving starts at the top, with you

"At the end of the day, all cost saving plans should be achieved through a team approach," Ewing reminds. "Make sure you have the support and buy-in from your staff. Asking for their opinions and suggestions regarding cost savings helps provide a healthy approach. Ultimately you will need their support in managing your business, through both good times and bad."

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