I was asked to write an article regarding growth and the obstacles that contractors face when growing their business. I want to go on record with the following statement: Growth is not your friend. Let me repeat that: Growth is not your friend.
Whatever you do poorly now, will only get worse as you grow. If you don’t manage people well, hiring more people certainly will not help you overcome a people-management issue. If you don’t like paperwork, accounting and the numbers, how is growth going to reduce these issues? Name one shortcoming you might have as a businessperson that growth will overcome. Ironically as an entrepreneur, all you want is growth and yet that is the single greatest danger to your business.
If you are not making a $100,000-a-year owner’s salary and company profit in your contracting business, your first goal should be to make a six-figure income. Most of the people in our networking groups make such an income. In fact, if you are not getting near that point, I will probably ask you to leave the group because I do not want to take money for something you cannot afford. It is pretty easy to earn this much but you have to do the basics right.
If you cannot do the basics, you do not need to grow. So the goal of growth has to be questioned prior to trying to get bigger just for the sake of getting bigger. My 27 years of experience as a management consultant has shown me that rarely does someone become more profitable by growing. Rather, businesses are structured at different levels and stages, each of which can be profitable.
Growth requires more people, more cash, better systems, more equipment — and the list goes on. Think of a contractor who went broke. Did he or she have a lot of work or no work? I bet they had a lot of work. So how come they went broke?
WonderLet’s start by reviewing the history and stages of contracting. We will refer to Stage 1 as “Wonder.” Most contractors start in business and wonder what they are doing — a truck, a few tools and off you go. Most new contractors started by moonlighting and as the moonlighting grew, it just made sense to go into business. They were being paid $15 an hour and their boss was making money and charging more, so going into business full time seemed logical.
In the beginning, new contractors do not have a lot of overhead. They work out of the home, they use the same truck they drove back and forth to work, and they have no marketing expense because they stole most of their customers from the old company. Heck, they may even have some leftover tools and supplies they “borrowed” through the years.
Since the owner is on the job everyday, he or she makes sure the company has excellent workmanship. When you do good work at cheap prices, you grow. As you grow, the business begins to change but prices and systems stay the same. Now you have to hire other people to help you. Since there are more people, the owner now must spend more time dealing with material, giving estimates, etc. Suddenly there is a lot of work but no money.
BlunderNow you have officially entered the next stage of business: “Blunder.” You have lots of work but even more stress. It seems like all you do is run around like a chicken with its head cut off. The harder you work, the worse it gets. The chaos grows and suddenly you find yourself spending much of your time babysitting employees and acting as an overpaid delivery boy. If you are not careful, you start to hire supervisors and others to help you. Instead of getting better, the whole mess just gets bigger.
As the owner puts down the tools, several things happen. You are not on each and every job, so details begin to slip. The workers don’t seem to get things done as fast as you did. Before you were just earning wages but now you are a manager and thrust into a totally different role. So what do you do to get out of this mess?
Increase your prices. You must build a nonworking-owners salary into your prices. If you have five employees and each works 2,000 hours a year, then this equates to 10,000 hours of production. If you want to make $50,000, it takes $5 an hour to pay your salary. If you do not build this into your price, it will not be there to take home. Raising prices and slowing growth will allow cash and systems to catch up.
Increase the time allotted in estimates. Understand that your employees are probably not going to get quite as much done as quickly as you did, not only because they do not work as hard, but also because of planning and communication. You did the estimate and the work before and now there is a communication gap. The person doing the work is not the person who estimated the job. We have found that it can take 10 to 25 percent longer to get the same job done without an owner on site.
Develop supervision. If you are not going to be on the job doing it, you must find someone to think and act like you. You need a foreman or lead person running that job. You can try hiring one but this can be difficult. Every job needs leadership. In the beginning you may have to stay on the job a half a day to get it going and manage the details.
Develop systems. All the job details were in your head before and that was OK. Your employees are not mind readers and you must develop systems to communicate customer expectations, job specifications and job costing. Without simple job costing you will fail. You must understand where you make and lose money.
Moving to the Next LevelWhat if you have a business that is doing a million dollars or more per year, understand the numbers and want to move to the next level? Basically you want a business that is less owner-driven. This brings on another whole new set of challenges.
My experience has been that most contractors are much better at managing jobs than they are at managing middle managers. Thinking outside of this job box can be quite challenging. Also, owners mistakenly think they are hiring themselves and management employees need little or no supervision. Before going down this road, you also need to ask yourself what you like and dislike about your business. If you enjoy selling and being in production, you may not like your new role of coach, advisor and scorekeeper.
There are two distinct paths to take when growing the business for the purpose of making the business less owner-driven. One approach is to replace the owner with middle management and the owner becomes the manager of managers. The second approach is to develop a manager/salesperson that does some of the same tasks the owner performs and to help run the business in the owner’s absence in case of illness, etc. These are two different strategies.
Understanding your personality will help you decide which approach to take. I also am making the assumption that the purpose of your growth is to create an enjoyable business, not just to make more money. If the business was unprofitable, hiring more salespeople and managers will probably not increase profits until you fix what is wrong. If your owner’s salary and profit are not at least $100,000 a year, you should not hire a manager or salesperson. You can easily make $100,000 a year by yourself and if you don’t, you need to fix that first. Your goal is to make money to grow. Your goal should never be to grow so you can make more money.