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by John Clancy
 
Profit is the “Holy Grail” of any business. Sure, it’s great to love what you do, but the goal of any business is to make money. But profit can elude businesses of any size, especially small businesses, which most residential integration companies are.
 
Every day we make decisions big and small which either lead us closer to the Holy Grail or push us further away. We constantly encounter forks in the road where two paths diverge. Most of us choose the path of least resistance most of the time. Let’s face it; competition is tough, and the days are short. It’s much easier to “go with what we know” and just take orders. Why make the effort to “sell” a customer who shows up and asks for a brand by name or a specific application they want? Why risk losing the sale? Take the money and run, right?
 
The easy path is a mirage. It’s a ruse riddled with traps that will undermine your business. One of the biggest traps is the “best-in-class” concept. Of course, any system must meet functionality and performance specifications, but “best-in-class” is not necessarily “best for business.” Spreading the wealth drives your costs up. There are costs associated with extra labor for programming, troubleshooting, technical support, and customer support. You also cheat yourself out of volume discounts, rebates, free shipping, and other benefits, which means you’re paying too much.
 
The other path – the path less traveled – may look ominous from where you stand today. But it’s actually much more profitable. Sustainable profitability relies on two very simple variables: cost and revenue. Many integrators don’t actually know their true costs, so there’s no way to know if a given project is profitable or not. Worse, most integrators sell on price, undercutting their own revenue. Unmanaged costs and lower revenue are not going to make you money. Yet this is exactly how most integrators operate most of the time.
 
Metrics
Most integrators are smart, talented technologists. The difference between a hobby and a business is the ability to consistently turn a profit. It’s not enough to be expert on hardware and software. You need to be expert in your own business. You need to measure the key financial variables. That means understanding your costs, knowing how much you need to charge, and managing cash flow. Having money in the bank and paying yourself a salary is not the same as financial health. Too often the deposit on a new project helps pay for the last one.
 
You can’t manage what you don’t measure, and you can’t make up margins with volume. This may be cliché or obvious, but the number of integrators who focus on increasing the number of projects they get each year is staggering. The reality is it doesn’t matter how many projects you have; it only matters how profitable they are. In many cases, integrators can make more money by strategically choosing fewer, more profitable projects. Taking on new business may mean hiring more people, renting more trucks, laying out cash upfront to purchase more hardware and supplies. Sometimes taking on more business can cost you money and strain your monthly cash flow and, inevitably, your profitability.
 
The goal is to get to a place where at the conclusion of every project you account for every labor hour, the cost associated with each hour, and every item shipped to that site. This data is missing from most businesses in the residential space. This data tells you if you’re actually making money, and if you need to increase your prices and/or lower your costs. Moreover, this can help you forecast and be proactive on your decisions, instead of reactive which can cost lots of money or jeopardize the viability of the business itself.
 
Forecasting
Build an annual budget, evaluate monthly, and adjust quarterly, if necessary. As we all know too well, there are cycles to our businesses, and rarely are these peaks and valleys ‘flattened’ to make it easier to manage. Staffing is one of the most critical and difficult aspects of the business to manage. Too often during a busy period new hires and/or capital expenses are added, but then aren’t needed a few weeks or months later. The opposite also exists during a slow period. Employees are laid off only to be needed again a few weeks or months later. As many of you know, hiring is extremely expensive, both in time and money. Then there are the opportunity costs – the jobs missed while you’re looking for and onboarding new employees. And that’s if you can find quality people, which is one of the most challenging problems in our industry.
 
The key is forecasting, and periodically comparing reality to your budget. Having a plan with anticipated outcomes can absolutely help you make more informed decisions during the peaks and valleys in your business. This also gives you a clear framework for managing costs, understanding what you need to charge for each project, and managing cash flow.
 
Profitability is the Holy Grail of any business. You must not only act in the best interest of your customers, but also in the best interest of your employees and yourself. Strategic partnerships with vendors is essential. If you can make yourself important to a vendor, there are several cost saving advantages to you. Even better, find a strong partner.

•      Fewer vendors mean less integration, less programming, less technical issues, less labor costs. Of course, quality of products (reliability) and support are essential to make this work. Cost of hardware pales in comparison to labor cost. Choose a vendor with the most reliable products and best support.
•      Choose vendors who value your business. A manufacturer that offers volume discounts, rebates, co-op marketing support, free training, free technical support, free expedited shipping. These are all hidden costs that erode your margins. Simply put, keep your expenses as low as possible.
 
If you choose strategically, you actually end up with a few very good partners, rather than a handful of vendors. There are many good manufacturers that make good products. The difference between a vendor and a partner is that in a partnership both entities are mutually invested in each other’s success. The most successful integrators look for a good partner, and often, the most successful integrators choose Crestron.