At a recent seminar, I had a chance to meet a struggling young couple. They had been in business about four years and now are $100,000 in debt. I meet so many people in this predicament, I wanted to take a moment and discuss some solutions and ideas on what to do next.
How did they get here?Dwelling on the problem is of little value but I think it is important to talk about how they fell into this financial trap. He worked for someone else and wanted to start his own business. Like others, he simply expanded his side work into what he thought was a real business.
His prices were cheap but he felt this was necessary to build the business and gain recognition. While he was working on the roof he did OK because he worked as a foreman and earned a wage for his actual production time. But he soon had more than he could do and the next step was to hire some crews so that he could go out and find more work. This was more than he could handle alone, so his wife quit her administrative job to help the business.
Basically, he went from a small outfit where much of his income was earned by his field effort and ability to manage job details to an unprofitable mess. There was no plan, no job costing and no systems; growth just wiped out their cash. To make matters worse, they lost their second source of income from the wife's salary. He has now taped into his home equity, owes the IRS money and is in real trouble. His dream of owning a business and having financial independence has turned into his worst nightmare. All too often this is the path the most enthusiastic of dreams follow.
So what does he do now? The first step is to swallow his pride and get back on the job as foreman. His second action should be to raise his prices and slow growth. Last, but not least, the couple must be realistic about their financial deficit and understand that it is going to take time to dig out of it. Denial and pride must take a back set to reality. Now is the time to regroup and move forward. The following are some basic rules to follow when a business is losing money:
Rule 1: Downsize to the point you can make money.My old adage still runs true: You must make money and use that money to grow. Never try to grow in an attempt to make money. Working in the field is the number one way to reduce overhead because the owner's salary is the largest item of overhead costs for most small companies. Working in the field reduces that cost. You are now earning more of your salary as a field worker and this will help reduce overhead. Not only will you reduce overhead, the company will be more productive because of the owner's presence in the field.
Rule 2: Cut costs.No matter how painful it might be, reducing costs is a much more cost-effective strategy than increasing sales. If you reduce your overhead costs, every dollar you save is a dollar you get to keep. If you sell more, you only get to keep the gross profit part of the sale-the hard costs, material and labor still must be spent. So if you save a dollar, that dollar goes directly to your bottom line. Even if the job comes in the way it was estimated and you had a perfect estimate, you are only going to get to keep the 30- to 50-percent gross profit generated by the job. Every dollar saved is a risk and cost you do not incur
Rule 3: Review your financial situation each and every month.Rather than try to rebuild of all your bookkeeping, do the best you can to start fresh. Have a monthly statement that you can review to see if you made or lost money. You have to start making money now and forcing yourself to look at the numbers avoids denial and further debt. Move now to stop the financial bleeding. As long as the business is hemorrhaging, the hole only gets bigger. Time is up; you must act and move forward now.
Rule 4: Have a realistic debt plan.Add up all of your debts and create a plan for paying them back. If you owe the IRS money, try to negotiate a payment plan and pay them back as soon as possible to avoid further penalties and interest. Never use the IRS as a bank; the cost of using IRS money is enormous. While the IRS can be difficult and slow to communicate with, the charges just keep piling up. Its computer just keeps running up the score. You cannot hide from the IRS. Be realistic, know what you are dealing with, and come up with a plan.
Rule 5: Rebuild slowly and avoid the problems that got you into this mess in the first place.Realize that having to work extra hours and go back on a crew need not last forever. After moving into survival mode you can take steps to avoid such problems in the future. Some of those steps are:
Step 1: Raise your prices. Yes, I know everyone tells you that your bid is high but that is typical. If someone told you that you had a perfect price, it would scare the heck out of you. Adding 5 or 10 percent to your bottom line can have a huge impact on your financial situation.
Step 2: Take time to build a crew. You must have at least one person in charge of the job. Don't hire a foreman and leave the crew without a transition period. Try managing your time and gradually working yourself out of the field. Start by cutting back to half a day and leave the foreman on the job for the afternoon.
Step 3: Learn to keep score each month. Get a bookkeeper who will run a monthly statement and look at the numbers each month. Also, review your sales success, where your leads come from, your closing ratio, etc. Develop a simple job costing system; if need be just keep a simple notebook and record the costs and time for each job. Keep it simple, but avoid denial.
In summary, don't feel too bad about losing money. Contractors have one of the highest bankruptcy rates in the country. If everyone could run a business, everyone would be doing so. Experience is an expensive teacher. Learn from your mistakes and move forward. And last but not least, remember: Growth is not your friend. Growth only works when you have the systems, capital and organizational support to do so. Be a little more patient, develop simple systems and an organization, and you will succeed in time.