Contracting Firm Needs Better Plans for Managing

Ben Carnes came to California from Colorado more than 20 years ago with hopes for a career as a country-rock musician. But he found there was a lot more work for a carpenter than for a guitar player--enough to build his own business.

Today, Carnes is president and owner of Woodland Hills-based Ben Carnes Construction, a general contracting firm that he founded in the early ‘80s that does home and commercial remodels and repairs. Over the last several years, the firm has grossed anywhere from $151,000 in a year to nearly $380,000. It has no heavy debt, operating out of cash flow and a $12,000 line of credit from local lenders. His average annual net profit over the last five years is $70,000.

That may sound like a comfortable figure, but Carnes is looking to the future with concern. Even after being in business for so long, he still waits on the phone to ring to find his next job, in part because, he said, he’s so busy running the operation day to day that he doesn’t have time to market the business.

He said he also has difficulty finding a qualified, stable work force, a problem that is exacerbated by the cyclical nature of the construction industry and by the fact that he offers his employees no benefits or other incentives to stay. He relies on from three to 10 temporary full-time employees, depending on the job and the business climate at the time.

Carnes would like to pursue another source of revenue, perhaps to buy properties, remodel them and then sell them for a profit. He also wants to develop management and labor forces able to direct the business without his daily supervision.

“In another 10 to 15 years, if we are exactly where we are now, we are going to start running into some problems,” said Carnes, who is 46.

Carnes already has problems, said Larry Spencer, founder and president of Business Improvement Systems, a Corona concern that specializes in working with business owners to help them boost revenue and profit.

Though Carnes has done well enough in getting to where he is today, he takes a reactive approach to doing business, Spencer said. He lacks a clearly articulated and financially based system of goals and strategies. And he, like many small-business owners, is the business. As things stand now, it couldn’t survive without him, even for a short period. Spencer and Jeff Ogan, BIS marketing director, met with Carnes to talk about helping Carnes manage his business better.

“A lot of successful small-business owners are used to relying solely on their own skills and their own drive,” Spencer said, “but if it leads you to the conclusion that you can’t find people that can work for you, that will be productive and that you can trust, then it is a very small, limiting circle that you cannot grow beyond.”

The first step for Carnes, Spencer said, is to decide exactly what his financial and business goals are. For example, does he want to grow the company, take on partners or keep it small?

He also needs to understand the fundamentals of a business.

A helpful starting point would be to read “The E-Myth Revisited,” by Michael Gerber. The book clearly explains a functioning business. Once Carnes understands that, he can sit down and redesign his business with his goals in mind, Spencer and Ogan say.

“Every business must be designed around the end product as it responds to customer needs,” Spencer points out. “The one thing [Carnes] has to offer right now that has made him successful at this level is his quality as a craftsman. He has to create a system of education and training to take normal, average people that he will hire and make them into superior-quality craftsmen.”

Carnes then must offer these trained craftsmen incentives to stay with the company. That could be higher pay, quarterly bonuses or even a vested interest in the company. At present, Carnes offers no special reward for loyalty or a job well done. When the work slows down, he does what construction bosses did to him when he was a young carpenter: He lays them off.

Whether or not Carnes decides he wants to grow the business, he can boost its profit at least 20% a year just by tightening up his business practices, the advisors say.

A company is like a bucket, Spencer said. All the business for that company is in the bucket, but there can be holes that leak profit. The advisors identified $32,200 in profit that Carnes could add in a year’s time through better management and the addition of a formal marketing program. BIS used a complicated formula based on several years of Carnes income statements and his actual costs of doing business to figure that dollar amount and others relating to profit.

For example, Carnes does not have a working budget in place. If he did, instead of taking a “rear-view” approach to business in which nothing is clear until it’s already happened, his company could target specific jobs that provide higher profit, the advisors say. Devising an annual flexible budget could net Carnes a 5% an profit gain, or $3,500 a year.

Adding a work-in-progress tracking system to help determine current project profitability at varying stages could put another $3,500 in Carnes’ pocket.

Such tracking would also help Carnes avoid costly miscalculations.

For example, in late 1998 and early 1999, Carnes lost money on a $280,000 home remodeling project. Carnes blamed the loss in part on cost overruns. But Spencer and Ogan contend that had Carnes had a tracking system in place, it could have raised a warning flag that would have allowed him to recognize what the overruns would cost his businesses and to instead pass the new costs on to his client.

One way to do that would be to charge clients using a system of “change orders,” a common industry practice that lets a contractor charge a client for extra time and materials if the client makes unanticipated changes.

Carnes has been reluctant to use change orders because of widespread abuses of the system by unscrupulous contractors, he said. Rather than risk his reputation, he has often absorbed the extra costs that result when clients change their minds in the middle of a project. The advisors agree that change-order systems often are misused by contractors, but they maintain that it is nevertheless a tried-and-true method of managing costs.

The advisors offered some other suggestions for improving profitability, and listed the projected annual profit gain from making those changes:

* “Profit engineering,” or designing his business and financial systems specifically to accomplish Carnes’ personal and financial goals: $2,100.

* Break-even analysis: $2,100. This is a process based on a formula that will tell a business owner the lowest level of sales at which the business will break even, before taxes. Knowing at what point he will be able to turn a profit will help Carnes bid for jobs more accurately based on his actual costs.

* “Customer modeling,” or knowing which kinds of customers to target, could add another $3,500 to Carnes’ annual profit. Profiling your customer base enables sales and marketing efforts to be directed to the people most likely to produce a lucrative job.

* Developing a marketing strategy could boost Carnes’ annual profit by $10,500. Over the years, Carnes has wrestled with how to market the business. He even did a video of a successful home remodeling job, but the tapes sit undistributed in a box. Ogan and Spencer say those videos could be marketed to potential customers through trade shows, home-remodeling shows or perhaps even sent to potential customers in high-dollar neighborhoods.

A good marketing system could identify these specific neighborhoods and even note home models that would make an ideal-customer base. Carnes in turn could send out brochures with pictures of a specific home remodel he is advertising with a reply request card for a free video, Ogan said.

Cultivating a referral system is another important thing for any small business, he adds. Carnes should regularly contact former clients who have offered him letters of referral. If the people bring in new clients, send them a thank-you card or a bottle of wine.

“Part of the problem is I have known some of those answers for a long time,” Carnes said. “Just implementing them has been difficult--actually getting my feet unstuck and doing what I know I need to do.”

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www.latimes.com/bizmakeform. Or you can write to Business Make-Over, care of Karen E. Klein, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.

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This Week’s Business Make-Over

* Company: Ben Carnes Construction

* Headquarters: Woodland Hills

* Type of business: General contracting

* Status: Sole proprietor

* Owner: Ben Carnes

* Founded: 1982

* Start-up financing: Personal funds

* 1998 sales: $376,000

* Estimated 1999 sales: $360,000

* Employees: Three to 10 full-time temporary employees, depending on the job and the market

* Customers: Owners of homes valued at $250,000 to $750,000, and owners of buildings such as dentists’ offices, churches, etc.

Main business problem

Lacks comprehensive business planning

Goal

Plan for the future so can be less involved with day-to-day operations

Recommendations

* Establish solid financial and management practices

* Devise and implement a targeted marketing plan

* Develop and reward a professional work force

Meet the Consultants

Larry Spencer is founder and president of Business Improvement Systems Inc. of Corona. Jeff Ogan is marketing vice president of the company.