Here's the magic formula for a business that spins off tons of free cash:
S * P * P = R squared©
Sales * Process * People = Results squared©
SALES times PROCESS times PEOPLE equals RESULTS squared.
The magic formula states that when you combine great Sales (S) technique with great Processes (P) throughout the company and load it up with great People (P), you will produce explosive financial Results (R).
What makes the magic formula so magical?
The rarity in which it is brought to life by contractors.
Imagine your company was the lowest cost provider, the one who owned all of the great clients, and one who was staffed by highly motivated and hard working employees.
Imagine that your company had hundreds of talented people begging to work for you. A company whose clients waited in line to get their work done because they knew you would take care of them far better than anyone else. A company whose cash flow was flush because; (a) your margins were incredibly high and (b) your backlog stayed full.
Got that picture locked in your head?
Can you see it? Can you feel it? Can you taste it?
Okay, we just described the S * P * P part. Now, let's look at the right side of the equation, the R squared part
Now, think about this. If you owned the company I just described, how much money would you be making?
Start off by figuring 50% gross margins on the work. Now factor in minimal overhead because:
- You need minimal bookkeeping personnel as your field leaders are sending in error-free paper work.
- You need very few estimators since they only pull together estimates on work you have in hand. No time wasted on unproductive bids.
- Your operations management staff stays lean as your jobs run smoothly and your field leaders take on greater responsibility.
- Your advertising expenses are miniscule as you are constantly flooded with leads generated by your sales team through networking and referrals.
- Your workers comp insurance costs are minimal as everyone works safely.
- Your unemployment insurance costs are low as you never have to lay off.
- Your bond rates are down as you are so sound financially.
Summing up your results:
- You have high prices.
- You have low field costs.
- You have low overhead.
Sounds like a formula for a financial windfall to me. What do you think?
SALES times PROCESS times PEOPLE equals RESULTS squared.
Sales * Process * People = Results Squared©
S * P * P = R squared©
Burn that formula into your head.
You will need it as we delve into the reason WHY SO FEW CONTRACTORS LIVE THE FORMULA and lay the ground work for the changes you may need to make in your beliefs about the best way to run your business.
Why Do So Few Companies Live By The Magic Formula?
Simple.
It's so darn hard to master one of the components, much less all three.
And as if the challenge of becoming great at one of the three components wasn't hard enough, company culture usually creates a major roadblock at being great at sales and process simultaneously.
Most companies are biased either towards sales or towards operations - and each has biased towards the other. Part of the underlying friction is their feelings with regards to process. On the whole, operations personnel are drawn to process and sales personnel are repelled by it.
Most companies have cultures that either embrace process and are distrustful of salesmen or they have cultures that embrace sales and tend to dislike standardized procedures (process).
Furthermore, sales personnel typically feel that operation personnel are not adequately committed to total customer satisfaction. On the other hand, operations personnel often feel that salesmen make promises to clients that can't be met.
What we have here is the irresistible force slamming into the immoveable object.
In order to bring the magic formula to life, the owner must develop a culture that values both sales and operations equally and promotes cooperation and teamwork between the two groups.
The Third Component: People
Appreciation for the role people play in the business' success doesn't always come easy for the individual(s) who built the company. But appreciating and valuing the team is a must if you truly seek great income.
An owner must also be sufficiently humble to realize that his or her employees are what make the company great; that employees are the source of long term competitive advantage, low cost, and high margins. As soon as the business expanded from being a one-man shop, people became its most valuable asset.
In order to nail the People piece, the owner must strive to eliminate unwanted turnover and to create a company that is viewed as an employer of choice.
To summarize the challenge, in order to bring the magic formula to life in your company, you (or the owner) must:
- Value sales and operations equally.
- Value and appreciate employees.
- Continually strive for better ways to perform the work, manage people, and keep the right clients happy.
Is The Magic Formula Really Worth The Effort?
It is if you are committed to building a great business; a business that generates substantial wealth for you and your family; a business that is virtually immune to economic downturns.
If you really desire outlandish financial results, the magic formula is a must.
S * P * P = R squared©
When you bring these three key components together, the results you get will blow away the results you will produce by any other means. Doing well at only two of the three components will produce far less income than will doing well at all three.
As we've already admitted, doing well at one is tough. Doing well at two is REALLY tough. Doing well at all three is UNBELIEVABLY tough.
For that matter, rare is the person who possesses the ability to nail all three components without receiving some form of mentoring or professional guidance.
Please don't take our message to be that you are financially doomed if you fail to bring all three components to life. Many companies do quite well while being great at just one of the three. Most highly successful companies only do two of the components well.
It's the elite companies that do all three well. And those companies make money hand over fist - and their owners grow filth rich. ;-)
Seriously, There Is GREAT NEWS For You
Odds are that there is not a single elite contractor in your city, much less in your market.
The opportunity for massive financial return awaits you. All you have to do is commit yourself to bringing the magic formula to life. Now is the time to put the magic formula to work.
Ron Roberts, The Contractor's Business Coach, developed this formula with Guy Gruenberg to help contractors turn their business into a profit spewing machine. The two are experts in all three components and can assist you on where you should start, how to create great sales organizations, develop strategic and tactical processes, and bring people together in a culture that achieves instead of clashes. Visit www.filthyrichcontractor.com now for more information.
