Too few entrepreneurs take the time to study their company’s structure in order to understand three important concepts. They are benchmarks, critical numbers and pressure points. Benchmarks are the general norm or standard for a ratio, percentage or amount for a specific measurement within a particular industry. Critical numbers are benchmarks that must be measured and achieved in order to optimize company effectiveness and profitability. Pressure points are key areas within a company where an entrepreneur must focus his or her management attention.
How it works in California. A landscape entrepreneur from the San Francisco area, Geoffrey, shared that all was going fairly well in his residential design/build firm. However, he eventually wanted to hire a full-time designer/sales person in a year or so as he felt that the market and his company could sustain such a hire. The total base salary and benefits for this person would be between $50,000 to $60,000. I then pointed out to the group that, at a 30 percent gross profit margin, if this new person could sell and add just $200,000 to company revenue, the company would be at a break-even for the new hire ($200,000 x .30 = $60,000). Of course, you want this person to sell more.
Geoffrey then chimed in that, with this new structure, an additional $200,000 in sales was a “no-brainer,” almost a certainty. He then decided that he didn’t need to wait a year, and upon returning home he would immediately start looking for the designer/sales person.
How it works in the Midwest. A client in the Midwest, Andrew, had more leads than he could possibly get to. The value of the pile of leads was somewhere between $300,000 to $400,000. If Andrew could turn around the leads and produce proposals, the work was his, but he just could not get to them. Last winter we discussed a potential new hire who would process leads, prepare proposals, design projects and help with scheduling. This person would allow the company to increase sales by 30 to 40 percent. Andrew had a person for this position in mind, and he hired him. Unfortunately, the new hire only lasted 30 days. He was too rigid and unable to work with the rest of Andrew’s team. He moved on. Andrew had the right idea but the wrong person. He now knew what he needed to do to change the structure of his company, increase sales and reduce his stress level.
How it works in New England. George had a small design/build company in New England. He did the designs, sales, accounting and all of the administrative work. He also worked with and supervised the field crew. His wife, Janice, had a good job but the commute was more than an hour each way. They contemplated Janice quitting her job and working with George full-time. It was a big step.
The three of us discussed the move. We concluded that if Janice joined the team, George would be free to sell more design/build work – roughly an additional $100,000. The increase should bring in at least an extra $30,000 gross profit, most of which would be net profit. Janice would also head the fine gardening division and attempt to grow it, adding an additional $10,000 to the bottom line. Going into their third season working together, George and Janice are very glad that they made the move. As anticipated, design/build sales are up significantly. The fine gardening division has more than doubled in sales. The automobile expense savings total more than $20,000. While working in a small, family business is not without its stress, it sure beats spending three hours every day on highways commuting to and from a job.
Conclusion. All three entrepreneurs realized that they had pressure points in the business where they had to focus their entrepreneurial zeal and implement key changes. If they could successfully do so, it would change everything for the better. By applying both industry and company benchmarks, the three of us knew exactly how much sales had to increase to make the desired changes work financially. The increased sales goals then became critical numbers that had to be monitored on a daily basis. Making structural changes to a business is always a leap of faith of sorts for an entrepreneur. But that’s what being an entrepreneur is all about: risk analysis. You can minimize – not eliminate – the risk through proper analysis.
JIM HUSTON runs J.R. Huston Consulting, a green industry consulting firm. See www.jrhuston.biz; mail firstname.lastname@example.org.