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20 | Kitchen & Bath Design News | November 2015 I f you're like most kitchen/bath dealers, you are probably fnish- ing up a pretty good year. Great! Now what are you going to do for an encore? The New Year will be upon you before you know it. Are you ready? If you're like most kitchen and bath dealer/owners, probably not. It still astonishes me how few folks in this industry actually prepare a detailed annual budget. Yet without that docu- ment, you have virtually no hope of realizing your short- and long-term financial goals. It's like trying to complete a huge $250,000 kitchen remodeling project to everyone's sat- isfaction without having a detailed foor plan. A SEN/ KBDN survey conducted a few years ago revealed that 83% of mainstream kitchen/bath dealers do NOT prepare an annual budget. And, the 17% who reportedly do prepare a budget probably do it the wrong way, or they don't use it throughout the year to help make sound business decisions. Or both. It's no wonder, then, that the vast majority of owners have weak – and even negative – balance sheets! That's why most only show a veneer of success…nice house, nice car, nice clothes…but no substantial reserves to really speak of. It's also why none have developed chains of 15-20+ independent- ly owned showrooms like in the European kitchen industry. Your counterparts know their numbers! HOW MUCH SHOULD BE MADE? If you ever attend an industry- specific business school, instead of another seminar on design, you might learn just how much money can really be made in this business. It's a lot! Indeed, properly planned and marketed, your business can be- come an engine for genuine wealth. You would also learn how to make it. Namely, you would learn what part of the business needs the most in- vestment to generate the greatest return. Here's a hint: It's not in more showroom displays. In addition, you would learn how much you need to have as an emergency fund to "backstop" your business in times of recession. Business experts would call yours a successful operation when it pro- duces multiple consecutive years of 8-10% pre-tax net profts. That's after a market-rate salary to you, the owner, which is typically 10% of revenue. So, for a $2,500,000 opera- tion in revenue, you should earn a minimum salary of $250,000 ( plus perks). And, the company should earn another $200,000-$250,000 mini- mum. For all of the risks involved, your company needs a good return on the equity left as an investment in the business. Assuming your business has a Sub-S legal structure, your individual tax return would be showing a min- imum annual income of $450,000 year after year after year. That hand- some number would probably place you in the top 1% of the nation's in- come earners – as well it should. If you have made that kind of money for at least each of the last fve consecutive years, then there is no need to fnish reading the rest of this column. If not, which should be most of you, stay tuned. HOW MUCH SHOULD BE SAVED? In my view, every owner, every gener- al manager and every sales manager should take a course on fnancial and business management – preferably an industry-specifc one because it better demonstrates critical concepts and strategies with useful applications in our feld for greater comprehension. If you are a dealer/owner, and not earning a minimum of 18-20% of revenue in salary and net proft, then there is a simple answer: You are probably not charging enough for your projects. You haven't learned your numbers. Yet numbers run a business, and cash is the fuel needed to power a company forward in rev- enue growth and proftability. Cash comes from many sources: owner's infusion, customer depos- its, bank loan, credit line and sale of assets, to name a few. But the most important cash comes from your bottom line…the net proft your com- pany makes every year. That cash is what fnances both your company's growth and its sur- vival in tough times. It's what should remain in a liquid portfolio for access within three to four business days. By liquid, I do not mean real estate. That is an illiquid investment whose reduced equity during a recession is virtually impossible to tap. Yet many kitchen/bath dealers love the notion of owning their own building. More than a few dealers who shut- tered their doors since 2008 were victimized because they had too big a percentage of their net worth in real estate. Given the depth of the Great Recession, and the duration of the weak recovery that followed, busi- ness experts are saying today that your liquid emergency fund (which does not include your retirement ac- count) should equal 12 months of your company's fxed expenses – not the three to six months of yesteryear. So, that means if your present fxed expenses (including your market-rate salary) equal $70,000 per month, then your goal would be to accu- mulate $840,000 in reserves before the next recession hits. That will be a very tall order if you aren't charging enough for your projects and efec- tively marketing the value of your company services. I have analyzed literally hun- dreds of dealer fnancial statements and can honestly report that 98% of owners don't have a clue about how to price their jobs. If they did, then their income statements would show the 8-10% net proft that American businesses desire, and their balance sheets would show a hefty equity number from consecutive years of high earnings. Furthermore, the top vendors they do business with would be experiencing much greater annual revenue growth. None of these results are happen - ing, largely because kitchen/bath design frm owners don't prepare and use a proper annual budget. But, it is critical to remember that a prop- er annual budget is your blueprint for making serious money in any business. HOW TO PRICE YOUR JOBS There's a direct correlation between your business budget and your price formula. That may come as a surprise to most dealers in our industry. So let's start with the right way to bud- get your business. It's best to develop one for three years at once. Why? Because it enables you to think strategically about where and how to grow your business. It also gives you more visibility and maneuver- ability as you manage your operation. It can be done efectively using an Excel spreadsheet. Here are the con- ceptual steps to follow: 1 Conservatively project Annual Total Revenue (based upon com- pleted business per salesperson). 2 Detail all of your Burden Expenses (i.e. indirect production costs that aren't easily job-costed). When the economy is strong, kitchen and bath dealers need to build an emergency fund so they will be prepared in the event of a downturn. Building an Emergency Fund Bettering Your Bottom Line { Ken Peterson, CKD, LPBC } "Given the depth of the Great Recession, and the duration of the weak recovery that followed, business experts are saying that your liquid emergency fund should equal 12 months of your company's fxed expenses." Read past columns and features and send us your comments about this article and others by logging onto our Web site: KitchenBathDesign.com