In the busy world of prefabricated components, there are three conflicting metrics that owners and managers look at to determine operational performance – board feet of lumber, sales dollars, and margin dollars.
I’ll start with what I believe is likely the most common but also the least informative – board feet of lumber, or fbm. Yes, I know that it is great to see large volumes of wood move through an efficient component plant. Bunks of lumber come in, are cut by automated saws, moved easily to the production tables, then out to the yard and quickly sent off to the job site. But fabricating stacks of components that consume large volumes of lumber tells us nothing about profitability. Also, 10,000 fbm of trusses for a cut-up custom house is not equivalent to the same volume of lumber used in a single run of large agricultural trusses, or for a number of “cookie cutter” type tract homes.
Of course, sales revenue is also popular. Running a plant that produces $30MM in components must be better than one that does $10MM, right? It’s the number that makes headlines and gets people excited about growth and expansion. But are your investors rewarded by sales dollars? Like the dazzling star of a high-budget movie, it’s flashy, attention-grabbing, and everyone wants to talk about it. But revenue is still only part of the picture. If your return per dollar of sales is low, it may be due to lack of productivity in your plant, sales incentives that promote gross sales rather than profitable sales, or a lack of attention to which jobs are profitable under your current pricing structure and which are not.
Finally, there is margin dollars. I like to think of this as what you can take to the bank. Certainly, fbm is not currency, and gross sales are not really yours since you need to pay for all your inputs, overheads, etc. before you get to take a penny to the bank. Margin dollars are what is left after you subtract the cost of producing and delivering those trusses from the sales revenue. In other words, it is the real profit, the actual money you get to keep and use to run and grow your business. Margin dollars may be less flashy, may be less readily apparent, but it is crucial.
Why Margin Dollars Matter
- True Profitability Picture: Sure, high sales figures look impressive on paper, but they don’t always tell the whole story. You could be selling trusses left and right, but if your costs are eating up all that revenue, your bottom line is not going to be happy. Focusing on margin dollars helps businesses understand their real profitability.
- Cost Control: Lumber prices can fluctuate, labor costs can rise, and before you know it, your margins are disappearing. By paying attention to margin dollars, companies can manage their costs more effectively, ensuring that they are not just moving money in and out, but keeping enough of it to sustain the business.
- Sustainable Growth: Sales might soar if you lower prices, but if those sales do not translate into solid margins, you will eventually feel the pain. Margin dollars ensure that growth is not just about expanding but doing so sustainably and profitably.
- Smart Pricing Strategies: Knowing your margins means you can set prices that keep you competitive while ensuring profitability. Smart pricing helps in maintaining a balance between volume and profitability.
- Investor Appeal: Investors want to see the whole picture. They are not just interested in how much a company is selling, but how much it’s actually making. Consistently strong margins suggests a company is well managed and can weather various economic storms, making it a more attractive investment.
While board feet of lumber or sales revenue might be easy to relate to, it is the margin dollars that ensures your component plant remains profitable and sustainable. Anecdotally, I have had many experienced people in the truss industry tell me that you can’t make money selling only large runs of agricultural trusses or tract housing, but I know of plants that have been successful doing just that for years. Similarly, I have had people tell me that there is no money to be made in doing custom houses, you need repetition to be profitable, but again there are many plants that have done very well for decades doing just that.
So, what type of work generates margin dollars? Is it the large runs or repetition of tract homes? Or is it the cut up custom homes with lots of set ups and design time? Is it possible that it can be both, or neither, depending on your pricing strategy? I will expand on my thoughts on this next month, and I invite you to share your thoughts with me at secord@thejobline.com.