There is a post on Facebook about Abraham Wald that has circled a few times. Wald was born in Romania in 1902, the son of a Rabbi and Kosher baker. He had a proclivity towards mathematics from the beginning, and it was quickly recognized. He studied at the University of Vienna. With Austria in economic distress in 1933 and his studies completed, there was no way he could get a job offer from the University. He ended up working for the Austrian Institute for Economic Research. This led to a job offer in Colorado Springs in the U.S. for the Cowles Commission. Only a few months later he got an offer for a professorship in New York at Columbia, and he was on the move again. This is where the story gets interesting.
While at Columbia, Abraham was put in the top-secret Statistical Research Group (SRG). The SRG assembled some of the most brilliant statisticians at the time. One of the largest problems this group was presented with during WWII was how to better protect airplanes from being shot down. The government brought the group a bunch of data they thought would be helpful to figuring out where to place extra armor on the planes. You can’t just add armor all over the plane; it would then be too heavy.
The data they had to look at showed that the fuselage would receive the most bullet holes per square foot. Next in line was the fuel system. When looking at the data, it would appear that the armor needs to go in those two spots. This is the genius of Abraham Wald: he looked at the data and said the armor should go where the bullet holes are not. His reasoning is that the bullet counts are not higher in other areas because it is causing the plane to go down, therefore you can’t get the data from the planes that do not return.
The ability to stop and analyze a problem from a 30,000-foot view is something more contractors need. We get so caught up in the moment. Things need to be done now, and they need to be done quickly, cheaply and on time. I’m here to say that isn’t the case. Sometimes the solution is to step back and look at the data in order to fix your problems. My guess is, though, that most of you don’t have any data. You get a check for $10,000 and then you have to buy some materials and pay some employees and then there is $4500 left. You now have $4500. No, no you don’t. You need to pay overhead, taxes, insurance, future vehicles and tools, etc. Many a contractor spends the entire $4500 though and ends up wondering why they can’t get ahead in life.
So where do you start with tracking your numbers? You can go back and review my business budget calculator tool. This will get you making enough money to cover overhead, pay yourself and be profitable. Now, we really need to dig into the numbers, and you need to start job costing your projects. It’s a new year, and we are organized after setting up our folder system last month. Let’s add another new task. You can download the job costing spreadsheet from www.flooracademypod.com/files.
What is job costing? Job costing looks at exactly what it took to do a project. You will need to track what you sold the job for, how much the materials cost, how many hours you think the project will take, how many hours the project actually took, add in any change orders and more, track fuel usage and costs. All of this gets applied to show how much actual profit a project is making you.
We often think a task will take ten minutes or an hour. Lo and behold, we are many times wrong. If you can’t accurately predict how long a project or task will take you, how do you properly bid it? Once you start studying the numbers of your business, you can’t un-see them. Your business can truly come alive at that point because you will begin to understand how it all works. You can see which type of projects are the most profitable for you. If you are contractor who does multiple floor types, then you may find you are doing way better on one or two types than the others. That would mean you need to increase your rates for the ones you are lacking on so that you can be just as profitable. My time is worth the same amount no matter what I am doing. Driving to the store, installing flooring, ripping out carpet, etc. They all take up my time, and my time is the only thing I have to sell. It should be sold at a premium and at a standard rate. There is no exception to the rule. I shouldn’t make more or less on one type of covering than another.
Alright, I will take that last part back. There are exceptions for how much to make on different types of flooring but not in the way you think. If I am handling tile that costs $50 per square foot, then you better believe my rate is going to be way higher than my standard rate to install a $3 per square foot tile. The liability is that much more and that needs to be considered. This goes back to job costing. If you truly know your costs, then you can truly find your liability and profitability.
Make sure you are getting all the data you can so you can start seeing the areas you need to collect data on or the data that is missing because it didn’t make it back to base. You deserve to run a business that makes money above and beyond providing you a paycheck. “Profit” is not a dirty word, and you are entitled to plenty of it for taking the risk of running a business.
