The 2 Figures Inside Your Business Plan That Determine The Price You Need To Charge

In 2007 I attended an annual conference for a franchised building company.

One of the speakers at the conference was a master franchisor from New Zealand who had just sold his company for $15 million to a private equity group.

This successful entrepreneur talked about a lot of different aspects regarding what it takes to run a successful building company and in particular, a successful business.

 

One of the things that really stuck in my mind was what he said about business plans.

 

And after emphasizing just how crucial it was for every business owner to produce and update their own business plan, he then shared how he carries his own business plan with him everywhere he goes and refers to it every day.

 

When thinking back to that presentation, I remember seeing this business leader standing there on stage with his briefcase containing his business plan by his side!

 

Now I know he didn't literally carry his business plan with him everywhere and certainly not on stage, however, that is the visual memory that has formed over time and it's what I think of every time we refer to our own business plan.

 

Simplify Your Business Plan

We now use a one-page business plan along with an online spreadsheet that is constantly updated in real time using past results that affect our future projections which keeps us constantly focused on what needs to happen in the business today in order to achieve our goals of tomorrow.

 

I often think about that day at a conference where the importance of creating and maintaining an up-to-date business plan was stressed over and over again.

 

And I wonder how big and detailed the speaker's own business plan was. Did it fill up his briefcase? What did it cover? How much detail did he go into?

 

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The truth is, business plans do not need to be overly detailed or complicated. They really can be as simple as a budget forecast. 

 

The thought of creating a 60-page business plan can be daunting for a lot of business owners.     

 

There’s nothing wrong with creating a 60-page plan, and at the Association of Professional Builders (APB) we run a one-day online business planning workshop every month where builders create their own business plans using the APB template.

 

It’s a great workshop for any builder to attend in order to create their first business plan, and then to attend again annually in order to update their plan and optimise it for the year ahead.

 

However, step one is always to begin by creating a forecast. The reason being, when you know what you want to achieve in terms of numbers, the actions you will need to take in order to reach those numbers will become very clear.

 

The Fundamentals For Creating A Budget Forecast

So rather than get bogged down in the details of a full business plan, here are the fundamentals for creating a budget forecast which is more than adequate in order to implement the Pricing 4 Profit strategy

 

There are a number of key performance indicators (KPIs) that a builder needs to budget for and monitor monthly. However, two of the KPIs that are used in the Pricing 4 Profit formula are the annual fixed expenses and the number of jobs you plan to sign over the next 12 months.

 

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In terms of the annual fixed expenses, this figure must include a market salary for everyone working in the building company, including the owners of the business.

 

As a rough guide, this is typically around 5% of annual revenue for most building companies. However, that percentage may not be realistic for your own particular business which means you’ll need to look at the job market in order to assess how much it would cost to replace the owners.

 

Remember, if you are drawing on a director’s loan or drawing profits at year-end instead of taking a regular salary, then your annual fixed expenses are not real and will need to be adjusted in order to avoid under-pricing your jobs.

 

The second KPI that forms part of your business plan, and is an integral part of pricing your future jobs, is the number of projects you plan to sign over the next 12 months.

 

Consider Your Projects Over The Next 12 Months

This will be the equivalent of the target revenue for the year, divided by the average contract value that the company is targeting. While contract values can and will vary, it’s important to operate in a reasonably tight bandwidth and niche.

 

Targeting high-end custom homes and then plugging the gaps with smaller remodelling jobs is not a good strategy in terms of marketing, operations or planning.

 

It’s much better and a lot more profitable to solely focus on one thing such as high-end custom homes.

 

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A quick review of previous jobs and looking at those actual figures for gross profit per-week-per-job will normally reveal that operating outside of a company's main niche is not as profitable as staying in your lane.

 

A lot of the time, saying no to potential clients can be a lot more profitable than saying yes!

 

To learn more about business planning, budget forecasting and creating a systemised building company that operates profitably year after year, check out this video.

 

It will take you behind the scenes at the Association of Professional Builders and reveal the tools being used by our members to generate more quality leads and more sales at higher margins while improving the building experience for their clients.

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