Kitchen & Bath Design News

APR 2014

Kitchen & Bath Design News is the industry's leading business, design and product resource for the kitchen and bath trade.

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18 | Kitchen & Bath Design News April 2014 F or most kitchen/bath dealers, 2014 prom- ises to be a year of increased sales – much wel- comed after years of weary hand-to-hand combat to make sales happen. But while an intense focus on generating sales is understandable and justifed, most dealers are still missing an equally important opportunity to better their bottom lines: reducing ex- penses. In my judgment, the two easiest areas on which to wield your cost-cutting scal- pel are material costs and personnel salaries. We've all heard the age-old mantra: "Buy low, sell high." Many dealers strive to follow the second part of the advice, but too few work on the frst part – a huge oversight. That's because the single greatest expense on your Proft & Loss Statement as a percentage of income – usually in the 60- 70% range – is your cost of goods sold. Indeed, a 1% re- duction in your cost of sales drops completely to your bot- tom line, increasing your net profts by fully 1%. The same is not true of a 1% increase in sales. By the time variable costs like commissions and payroll taxes are paid, only a frac- tion of the 1% falls to the dealer's bottom line. And when sales increase dra- matically in one year – like the 15-20% some dealers reported in 2013 – more human errors are typically made in the planning, order- ing, manufacturing, shipping and installation of products, generating lower gross mar- gins. As a result, a 1% sales increase can actually reduce that fraction of 1% to a zero improvement – or even gen- erate a negative impact on the dealer's net proft. BUY BETTER Buying groups offer one possible option for lowering product costs and increasing proftability. Imagine that you're a typi- cal kitchen/bath dealer with sales of $1,000,000, cost of sales at $650,000, gross profits of $350,000, and net profts of $50,000 (after market-rate salaries for you and your staf). You've taken the leap of joining a buying group, costing about $2,000 annually (when including con- ference attendance expenses), and fnd fve preferred ven- dors in the first year that you can easily switch to. So you shift $100,000 of your purchases to them and col- lectively save 3% or $3,000 in the process. Furthermore, you earn another 2% in pur- chase rebates paid. Now compare what your Income Statements (simplifed) would look like (see chart above). That $3,000 addition to your bottom line may not seem like much. But it actu- ally represents a robust 150% return on your $2,000 mem- bership investment. Now imagine in year two that you switch another $100K in purchases to fve more preferred vendors in the group and you convince a friend who is a non-com- peting kitchen/bath dealer to join the group. This new member follows your lead and picks up five of the same preferred vendors. You buy a total of $200,000 and your friend buys $100,000 and you each save 3%. As a result of this $200,000 increase in purchases, the group now earns on average 2.25% in rebates. That's how each member-dealer gains additional purchasing lever- age: by focusing on a select few preferred vendors and growing their sales within the group, triggering greater rebate percentages. Repeat the same cycle in year three and the added ag- gregate purchases help boost the group's average rebate rate to 2.5%. In year three, your P & L Statement com- parison would now look like this (see chart above). The combined $9,000 im- provement in lower material costs (3% on $300,000) and $7,500 in greater rebate dol- lars (2.5% on $300,000) yields an overall $26,500 positive impact on your bottom line. Need real life proof of the "Power of One"? During the period of 1995 through 2012, one buying group dealer from suburban Philadelphia, that today does about $1,200,000- $1,300,000 in annual revenue, earned $208,000 in rebates alone. PERSONNEL EXPENSES After the costs of goods sold, the second biggest expense on a dealer's P & L Statement is personnel salaries. It is true that the quality of the people you hire – in character, skill set and motivation – will al- ways be a cornerstone for success. But how well they are organized, compensated and led will determine the qual- ity of their performance and, therefore, drive the fnancial performance of your company. I've written previously about the key economic driver for kitchen/bath de- sign frm owners, defning it then – after reviewing some 71 years of kitchen/bath dealer financial statement data – as gross proft dollars/ payroll expense. Given this defnition, dealers who have payroll installers would have their best fnancial interests served by spinning them of as subcontractors. Concerns over a lack of scheduling control, leading to a decline in customer service, will be mitigated by employing an efective project manager. Companies that invite independent kitchen design- ers to follow up their leads would presumably have a comparable parallel beneft. I don't favor this business model because dealers rare- ly can deliver the promised design/consulting experi- ence, regardless of which independent is assigned to the prospect. Over time, this inconsistency diminishes repeat business. And, in my opinion, the motivation is also lacking among independents to build higher sales volume and gross margins that a co- hesive and competitive sales force will generate…two key factors that augment the numerator (i.e. gross proft dollars) in this economic driver equation. My preference is to sell your team, whether they are sales designers or support staf, on the value of market- rate compensation at the lower end of the scale, plus a generous retirement ben- eft. With people living much longer, and out-of-pocket medical expenses averaging $240,000 today for the typi- cal retirement couple, we are a nation largely unequipped to enjoy a comfortable life- style without running out of money. Too many kitchen/ bath dealers do not include a retirement expense in their annual budgets. Yet decades of retirement savings, wisely invested, can provide ample funds to meet that objective for team members even with moderate annual incomes. As business owners, shouldn't we shoulder that mantle of responsibility and leadership for our employ- ees? Ken Peterson, CKD, LPBC, is president of the Chapel Hill, NC-based SEN Design Group. For more in-depth informa- tion on topics featured in this column, attend a sales or business management seminar in your region con- ducted by the SEN Design Group and co-produced by the KBDN. Peterson can be reached at 1-800-991-1711 or "In my judgment, the two easiest areas on which to wield your cost-cutting scalpel are material costs and personnel salaries." Unafliated Buying Group Afliation – Year 1 Buying Group Afliation – Year 3 Income $1,000,000 100.0% $1,000 100.0% $1,000,000 100% Cost of Sales 650,000 65.0% 647,000 64.7% 641,000 64.7% Gross Proft 350,000 35.0% 353,000 35.3% 359,000 35.3% Overhead 300,00 30.0% 302,000 30.2% 302,000 30.2% Rebate 0 0% 2,000 0.2% 7,500 0.7% Net Proft $50,000 5.0% $53,000 5.3% $66,500 6.6% Read past columns and features and send us your comments about this article and others by logging onto our Web site: Bettering Your Bottom Line { Ken Peterson, CKD, LPBC } Tips for Where To Cut Costs Reducing expenses is critical to increasing the bottom line, and this can be done through judiciously evaluating everything from product costs to personnel expenses. KBD_18-19_BetterBottomLine.indd 18 3/14/14 9:13 AM

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