Finally, you’re a $5 million company! Your competitor is stuck at $3 million, wiping your truck’s dust from his face as you screech off into the sunset. So long, sucker! But are you really more successful? The other company has its bills paid and just implemented a retirement plan while you just raked someone over the coals for using an extra seven inches of tape. The difference between revenue and profit is huge — and that extra revenue won’t matter if you can’t keep any of it.
With a slogan of “you can’t manage what you can’t measure,” we asked Danny Kerr, co-founder at Breakthrough Academy, for some advice on revenue forecasting. For him, though, it came back to profit. By starting with how much profit you want to make, you can work backward to see how much revenue you need to generate. Once you know that, he said, you can manage and update your projections throughout the year. “I think a lot of business owners base success on how big the business is, but there are a lot of businesses out there bringing in a lot of money that are on the cusp of bankruptcy,” he observed. “That’s because where their focus was and where their focus goes is where the results go. If you’re focused on revenue, you’re going to grow revenue. If you’re focused on net profit, you’re probably going to grow net profit.”
Much of what he talks about relates to these three important themes:
- Knowing your benchmarks and what to practically look for
- Identifying your people and processes needed to hit your benchmarks
- Isolating changes needed to improve the metrics
Step 1: Determine how much revenue you need
You can come up with a revenue benchmark by working backward from how much net profit you want to make. We’re going to use a yearly net profit of $200K as an example.
After you set a goal for net profit, look into your annual overhead cost (expenses that aren’t tied to a particular job); for example, office expenses, marketing, equipment, vehicles, salaries for people who aren’t labor, etc. For our purposes, let’s say that’s $500K.
Next determine the average gross profit you make off each job. Gross profit is what you bring in after paying the cost of the individual project — painter salary, materials, etc. If you get paid $5K on a job and you have $2K after expenses, you’re at a 40% gross profit. For this exercise we’re going to say that’s your average per job. Take your overhead plus your projected net profit and divide it by your average gross profit of 40% (or 0.4). The result is the amount of revenue that you need to produce to reach your net profit goal. In this case, you would need $1.75M to meet your goal. See below for the equation.
Use this equation to determine your required revenue to hit your net profit goal.
Step 2: Create a sales plan to meet your goal
Simply put, how much work do you need to hit $1.75M by Dec. 31? For your answer, divide your goal by how much you make on the average job. If your average job is $5K, you’ll need to complete 350 jobs for the year.
Next, determine how many quotes you need to produce to get those 350 jobs. If you average three jobs for every 10 quotes (30%), a quick swipe of the calculator puts you on the hook for 1,166 quotes for the year.
Since quotes are based on leads, calculate how many of your leads will result in a quote. “This isn’t something that most contractors track, but it’s useful to track what’s called lead capture rate,” said Kerr. “For this, look at how many leads come in each week. If you get 10 leads per week and nine of them get set up for estimates, you have a 90% lead capture rate. So take your number of quotes, divide it by 0.9 and that means you need 1,296 leads generated for the year.”
All that said and done — and once it’s said it needs to be done — these numbers give you a good idea of what’s needed to come up with your $200K.
Create a sales plan to help you track the likelihood of hitting your revenue target.
Step 3: Determine your production plan and hourly rate
From here, figure out your hourly rate — the cost of labor and materials that go into producing a specific job (vs. your overhead, which is not job specific). The easiest way is to divide last year’s revenue by total labor hours. If it turns out that your painters can produce $65 per hour for each hour of work, you can then determine how many hours of work you’ll need to hit that $1.75M. We’ll save you some button-pushing — it’s 26,923.
Now, be realistic when you determine how many painters you need to meet 26,923 hours. Painters aren’t working 40 hours a week, 52 weeks a year. They might be employed for 40 hours, but they’re probably producing for 35. So let’s say they’re working 35 hours a week 49 weeks a year, what with vacation, sick leave, emergencies and scrolling through their phone. All that put together will give you an idea of how many painters you’ll need in order to hit your mark, which will help you right-size your team so you don’t stretch your crew beyond its capacity or bring on a bunch of people when you don’t have anything for them to do.
Create a production plan to forecast how many employees you will need to produce the work for your revenue goal.
None of this is easy, Kerr acknowledged, but it does keep you on your game.
Put those numbers to work
It’s important to remember that revenue won’t come in 12 even monthly chunks. June and July might be gangbusters. January and December not so much. By figuring out how your work trends, you can see whether you’re on track and also make plans early to hire extra help for the busiest months. If February is projected to provide 7% of your revenue, and you get 5% you might try to figure out how to bump up a few months down the line, or revise your expectations and act accordingly. Bad news for your paycheck, good news for knowing you need to take action.
Another outcome: If you’re projecting a certain revenue for July and you’ve got it booked, you can leave July alone and focus on months that need more attention. “Keeping track of your numbers will make you very proactive in your approach versus reactive,” said Kerr. “However, most people don’t do this. They get a bunch of work, realize they don’t have enough painters, then try to figure out how to hire painters that week before all that work’s about to hit. Then, everything’s always behind the eight ball, versus when you can do this in January and get ready for your entire year. You can see that in June you need 15 painters and you currently have five, so you need to go on a hiring blitz between now and June to get ready for that revenue that you haven’t even booked yet.”
If it’s not going your way, and if it’s starting to look like 1.35 instead of 1.75, you can adjust. “In that case,” said Kerr, “you need to question yourself: Should I go and spend all this overhead still? Should I hire all those painters or should I slow down hiring until I can prove that I can book enough work to get this financial plan the way I intended?”
If there’s any lesson here, it’s to pay attention to the numbers. They don’t have a reason to lie as much as we have a reason to ignore them. “Every time any of these numbers is off from where it should be, you know where to focus your energy,” said Kerr. “Now it goes from what you feel needs to happen in the business to what the facts are.” Since you’ve measured, you can manage.
APC Danny Kerr is co-founder of Breakthrough Academy. Get a Free Budgeting Quick Tool by clicking here.
