Profit isn’t everything when it comes to running a business, but if your business isn’t making consistent profit then over time, your passion will give way to frustration.
As a very small business – just you and a few helpers – it’s easier to stay on top of everything. You know how much your jobs sold for and you have a good idea of how much time you can afford to spend before you need to move on to the next one. But as your business grows in size, and staff, more and more owners lose touch with that connection to field results. Staff are paid hourly or salary and not by company success. Most staff have no idea what they should be selling or producing to justify their wage. They just put their head down and go to work. There’s little incentive to work harder, and there are very few quantifiable goals to work towards.
If you want better staff, that has to change. Working without clear goals is like teaching someone to play the piano with earplugs in their ears! They hear muffled sounds, but they’re never going to be any good. They can’t hear what the music should sound like, and they can’t hear whether their playing is in tune.
Goal-Setting for Sales/Design Staff
In a recent visit to a friend’s company, there was a disconnect between what the owner believed his sales staff needed to sell, and what his sales staff believed was realistic (and even possible). All parties are good, smart, talented people. They’re going to go places. They just have different instincts on what they could realistically sell in a year.
So how do you bridge this gap? If you start from a ‘rewards’ or ‘profit’ first mentality, the answers are as black and white as the text on this page. With some simple numbers that any company can get their hands on, you can make sure the sales goals directly correspond the rewards for the individuals (for the owner, it’s net profit, for the designers, it’s their wages).
Let’s use our imaginary friend Dan to put some real numbers to this example. Dan would like to finish up the year doing about $1.2M in design-build sales. He has 2 designer/sales-people. Dan sells some of the work, but he’d like to transition out of sales and is hoping his design staff can pick up the slack. One is more experienced than the other, and is better paid, so Dan assigns the following sales goals:
| Position | Annual Salary/Wage | Sales Goal |
|---|---|---|
| Senior Designer | $60,000 | $600,000 |
| Junior Designer | $45,000 | $400,000 |
| Dan’s Sales (Owner) | $200,000 | |
| Company Total | $1,200,000 |
Looks reasonable, and it adds up to $1.2M, but is it right? Before we dive right in, we just need a few more (very)important numbers.
The senior designer looks at Dan’s goal and says “Dan, it was a struggle to get to the $500k mark. I can’t do $600K.”
Dan wasn’t profitable last year and he knows that’s never going to change unless his company sells more work. If anything, in Dan’s mind, the goal needs to be even higher! But neither one knows for sure. Until they turn to the facts.
Let’s start with the Senior Designer’s sales goal and figure out who’s got it right.
Note: the numbers used in this article are realistic averages but are intended for example purposes only… they can’t be considered applicable to all companies. Know your company’s numbers.
STEP ONE: Budget the overhead to be covered by the senior designer
Dan’s company has $300K of overhead expenses for his design-build division. That’s a pretty average overhead budget for a company of his size ($1.2M in sales). His designer’s sales goal is $600K, or exactly half of his total design-build sales goal of $1.2 million. It’s logical then to assign exactly half his overhead, $150K, to this senior designer’s jobs.
STEP TWO: Estimate cost of goods sold expenses
Dan’s costs to do the work (the costs of labor, equipment, materials, subs), on average, consume about 67% of the selling price of the job. This is also in the normal range. 60%-70% is typical of a successful design build company. 45% to 60% is typical for a successful maintenance company.
You can estimate your own cost of good % by dividing your total job costs (field wages + equipment + materials + subcontractor expenses) by your total sales. Note that different divisions can have very different averages. For example, install work usually has a higher cost of good sold % because of the material expenses involved.
With these numbers alone, we can easily determine if this design/salesperson is overpaid or underpaid using our ‘rewards-first’ process.
| Start With:Senior Designer’s Sales Goal | $600,000 |
|---|---|
| Subtract: Company Reward (Net Profit at 10%) | -$60,000 |
| Subtract: Senior Designer’s Salary | -$60,000 |
| Subtract: Estimated Job Costs @ 67% of sales goal | -$402,000 |
| Subtract Share of overhead MINUS the designer’s desired salary (since we already included it above) $150k – 6$0k | -$90,000 |
| Result (amount left over) | -$12,000 |
Uh-oh. That’s not going to work. We’re $12,000 short. Who’s going to eat that? Overhead is fixed, there’s nothing we can do about that. We can’t just cut job costs – we need those workers and materials. The company has to make a fair profit or we might as well close the doors. So what gives?
The answer is simple. Using a reward-first approach, this designer is worth an annual salary of $48,000. That will offset the $12,000 shortfall and everyone will be happy.
Except, of course, the senior designer! They insist that they need to make $60K! They’ve got a family, kids, a mortgage and we like this person. So, using our rewards-first approach, let’s set a goal that works for everyone.
In the example below, I assume overhead remains fixed. Overhead costs won’t necessarily change if we increase our sales by a nominal amount, but they will change over time and it should be recalculated each year at a minimum.
| Start With:Senior Designer’s Sales Goal | $650,000 |
|---|---|
| Subtract: Company Reward (Net Profit at 10%) | -$65,000 |
| Subtract: Senior Designer’s Salary | -$60,000 |
| Subtract: Estimated Job Costs @ 67% of sales goal | -$435,000 |
| Subtract Share of overhead MINUS the designer’s desired salary (since we already included it above) $150k – 6$0k | -$90,000 |
| Result (amount left over) | $0 |
Perfect. If our sales/designer wants to make $60K/year, their sales goal is as black and white as the text on this page, and it took about 5 minutes to figure it out. Dan’s confident that he’s set a profitable sales goal, and the designer understands that this isn’t just throwing darts at a goal. The math does not lie. Hopefully, the very next thought in this designer’s head is “Wow. If could sell $900K, I could make $90K!” And, for Dan, they’d be worth it.
Now repeat the same process for the junior designer so they understand what they’re worth and the sales they need to generate to reach their desired income potential.
Of course, we need to make sure these estimates are accurate and that the jobs are finished on budget. But your field staff’s productivity can be improved using the same rewards-first approach. Next month, we’ll take a look at how to set Production Goals for foremen, with the same clear accountability to simple facts and numbers and not gut instincts.
