Masonry Magazine December 1988 Page. 7
Planning For Profit
by Anthony F. Costonis, Ph.D.
I. Introduction
One of the most critical challenges that you face as a senior executive of a masonry contracting firm is establishing a strategic business plan to guide and direct the activities of your company through the uncertain and volatile construction marketplace.
Among the issues which you must consider are:
1. The changing conditions of the external marketplace; will it expand? contract? or remain stable in the foreseeable future?
2. Should you emphasize growth, specialization, or diversification?
3. Should you attempt to adjust your company's market position? Your pricing strategies? Your cost control strategies? Your cash flow management policies?
4. Should you make changes in your resource management? Human resources? Technical resources? Physical resources? Or some combination of these?
However you choose to answer these questions, your commitment to develop a strategic business plan will have a profound impact upon the bottom line your company will generate.
The purpose of this article is to introduce a new and useful method of strategic business planning. We call it the CDS Model of Strategic Business Planning, or the CDS Model for short.
II. The Logic of the CDS Model of Strategic Business Planning®
The logic of the CDS Model becomes clear when you look at the steps involved in putting together a strategic business plan for your company. These steps involve an understanding and familiarity with the four major variables of the CDS Model: 1) Overhead, 2) Volume, 3) Markup Rate, and 4) Pretax Net Income. In the Model, Overhead is the annual investment your company makes in its people, plant, and facilities. Volume is the annual revenue your company is capable of generating. Markup Rate measures the price your company bids relative to the direct costs it will incur. Pre-Tax Net Income is the annual profit your company earns after direct costs and overhead are expended.
The relationships underlying this Model reflect the process by which a construction company learns how to survive, grow, and prosper in the competitive structure of the industry.
OVERHEAD: The Fundamental Planning Statistic
The first step in using the CDS Model is to determine the level of risk you are willing to take to position your company to compete in the marketplace. For example, do you want to become a $750,000 a year masonry contractor? A $5 million a year contractor? A $20 million a year contractor?
© Copyright 1988, Corporate Development Services, Inc., 220 Broadway, Suite #105, Lynnfield, MA 01940. 617/595-0550. All Rights Reserved.
Costonis
About The Author
Dr. Anthony F. Costonis is President of Corporate Development Services, Inc., Lynnfield. MA. a management consulting firm exclusively serving the construction industry. This article has been excerpted from Dr. Costonis' soon-to-be published book, "Strategic Business Planning: An Overview". Born into a family with a long tradition in the construction industry, Dr. Costonis financed his way through college and graduate school by working in his family's construction business as a laborer, foreman, superintendent, and project manager from 1953-1964. After earning his B.S.B.A. from Boston College in 1958 and earning his Ph.D. from the University of Chicago in 1977. He taught at the University of Wisconsin from 1964 to 1968. In 1968, he founded Corporate Development Service, Inc.
While many factors shape these decisions, the only one you can know with any degree of certainty before your planning process begins is that you will incur a "cost of doing business". Another term for this cost of doing business is Overhead Investment.
The CDS Model identifies three different types of overhead investments: 1) Direct Job Overhead, 2) Indirect Overhead, and 3) Operating Overhead.
Direct job overhead is the investment you must make in the tools and equipment necessary to support company activities in the field. These investments may include trucks, scaffolding, forklifts equipment which must be put in place before one project is started.
Indirect overhead is the investment you must make to purchase the services of the people who perform all of the middle management functions of your company. This investment includes their compensation, associated fringe benefits, and operating expenses such as taxes, insurance, automobile expenses and selling costs.
Operating overhead is the investment you must make in the buildings and outside facilities used to physically "house" your company. This investment includes rent, heat, light, power, telephone as well as outside third party professional services such as legal, accounting and consulting.
Taken together, these three types of overhead investments allow you to address such vital questions as:
* How much should I be willing to invest to support the field operations of my company? That is direct job overhead.
* How much should I be willing to spend to hire and support competent people as the middle management team of my company? That is indirect overhead.
* How much money should I be willing to spend to house and support the operation of my company? That is operating overhead.
please turn page
MASONRY-NOVEMBER/DECEMBER, 1988 7