It's cool to have an office, isn't it? It has that certain flair that's not just good for the ego, but it carries a unique allure and status that makes you stand a bit taller. "I've got a shop, an office, a place to store my stuff, a sanctuary where my professional life can breathe away from the domestic hubbub. No more paint cans tucked away in the garage or a disgruntled spouse complaining about the encroachment of business paraphernalia into our living space. I can finally feel legit."
All these thoughts swirl around in our heads, creating a vortex of justifications for owning an office or shop for our contracting business. But, my friends, in this grand dream of ours, let's not forget one vital question: Can we actually afford it?
Before you jump into a lease or purchase agreement, I encourage you to conduct a little exercise with me today. It's a simple enough task unless, of course, your month-end routine involves counting piles of money lying around, then maybe you can skip it. But, we both know that's not the case for most of us. So, before you decide to add to your overhead, take a few minutes to understand if you can truly shoulder the additional expense of a workspace.
To begin, there are five pieces of information that we need to collect:
Average Job Size: Calculate this by adding up the revenue collected and dividing it by the number of jobs you've completed over a certain period. For simplicity's sake, let's say your average job size is $1,500.
Closing Rate: Out of every ten leads, how many convert into paying jobs? Let's assume a 40% closing rate for this example, meaning you're selling four out of every ten leads.
Gross Profit: This is your total revenue minus the direct costs associated with producing your work. Let's proceed with a 40% gross profit for our scenario, meaning that a $10,000 job costing you $6,000 to produce leaves you with $4,000 gross profit.
Rent/Space Cost: What's the cost of your prospective office space? Include utilities, internet, and all other expenses you'd incur. Let's assume it's $2,200 per month for our case study.
Annual Overhead Increase: This is the additional annual overhead you'd incur due to renting or buying the office space. For a $2,200 monthly rent, that's an increase of $26,400 annually. Let's add a security deposit and last month's rent of $4,400 to this amount, totalling $30,800.
With these five pieces of information in hand, let's proceed to the math. The annual overhead increase ($30,800) should be divided by the gross profit (40%). This calculation tells us that we'd need to sell $77,000 worth of additional work just to break even on the cost of the office space. But we're not done yet.
To figure out how many more projects we need to accomplish this, we divide $77,000 by the average job size ($1,500). This comes out to roughly 51 additional jobs required annually to cover the overhead increase.
But how many more leads do we need to close those 51 jobs, given our closing rate of 40%? Simple: 51 jobs divided by a 0.40 closing rate equals approximately 128 additional leads. In simpler terms, we'd need to generate about 11 more leads per month or two to three more leads per week to break even on the cost of the new office space.
Now, if you're looking to rent an office or add any overhead expenses to your business, this framework provides a clear understanding of the increased revenue, projects, and leads needed to support those costs. The numbers don't lie, and running these calculations can save you from making a financially unwise decision.
Remember, while an office or shop space might boost your ego, it should never burden your business. Having clarity on the requirements to break even on such overhead expenses is essential. It always starts with driving leads and sales. Understanding precisely how many more leads and sales are necessary to cover these additional costs keeps you from biting off more than you can chew.
So, before making that leap, take a moment to run these numbers. Add some discipline to your dreams and make sure your business is ready for the growth you're envisioning. It's not just about affording it - it's about ensuring your business thrives despite it. And, isn't that what we're all striving for?