Business always has ups and downs, and fluctuations are to be expected. The U.S. economy has been enjoying an economic building boom for over 10 years. The housing slowdown is definitely impacting certain areas. However, things are not as dire as one might think. Having been a consultant for over 30 years, I have been through 18 percent interest rates in the early 1980s and the savings and loan crunch of the early 1990s. Business has a way of cycling. We are about due for a correction in the market, and good businesses survive. In fact, some business positions improve following a slowdown. It is easier to find people, some of the weak competitors die out, supplier prices can be more competitive, etc. The following list of activities can prove helpful should you encounter a slowdown.
Be a LeaderFolks want to know that the boss has a plan and things will be OK. Sending a doomsday message to employees can create a self-fulfilling prophecy in which salespeople, including yourself, believe your prices are too high and no one is buying. You want to let your employees know costs are up and sales are tighter, and inspire them to work harder and help the company succeed - not leave the company and look for a job somewhere else. Let everyone know the plan and stress how important it is to make each job productive and for the company to be on its “A” game.
Now is the time for you as owner to show your stuff. Maybe you are the company’s best salesperson but currently sell little yourself. Now might be the time to get back into the sales game. Possibly you are the field genius that can make jobs more productive. Now is the time to put your project management hat back on and help out. Leaders make things happen. They don’t act like seagulls that ride up to the job, get out of a fancy vehicle, and dump on people. They are eagles that the employees see as hunters and killers that make things happen in the heat of battle.
Trust the Right IndicatorsThe U.S. and Canadian economies are regional in nature. Business can be booming in some areas and down in others. Don’t rely on national input but rather look at your own market. Also, look at your own internal factors. Don’t listen to distributor reps, other contractors and hearsay. Judge the facts. Look at local economic data regarding employment, housing, etc. More importantly, look at your own internal data such as the number of jobs you are estimating, phone calls, closing ratios, etc. Your skills as a businessperson, your specific market, your brand name and other factors drive your company’s success, and you must look internally at such indicators.
Maintain PricesAs the market slows, it can be tough to maintain margins and pricing, but cutting prices and trying to correct the slowdown with more volume can be financial suicide. Unfortunately, many contractors do not know their costs and as the market tightens, they simply cut prices. Contractors who randomly cut prices are the first contractors to go broke. Blindly cutting prices can create a financial break-even point that is impossible to reach.
The example in Figure 1 illustrates the impact of cutting prices. Our example shows a company with $1 million in sales and a break-even point of 30 percent (or $300,000 total gross profit). While these are arbitrary numbers, you can easily see the devastation that can be caused by arbitrarily cutting prices. If your gross profit is higher - say, 40 percent - a 10 percent price reduction is less dramatic. Of course, if your gross profit is lower - say, 20 percent - the impact is even greater.
In the example detailed in Figure 1, a 10 percent cut in prices forces sales to grow by more than a third to break even. Such growth is not realistic in a slow market. Maintaining margin and selling jobs at sufficient prices is the most realistic strategy for most companies. If you do cut prices, you also have to cut costs, and that is not so easy.
Reducing CostsProfit margins can be best achieved through cost reductions. Remember that every dollar of cost cutting goes directly to your bottom line; every dollar of work sold requires the successful completion of the job. Only after the job is finished and overhead is recovered will you show a profit. Cutting cost can be painful, but for many contractors it is the only choice. Do things such as:
- Conduct a line-by-line review of each and every cost and build a new budget.
- If you pay your bills on time, seek a better discount. Suppliers are facing tougher collections, and you should be rewarded for your financial strength.
- Review ever-increasing costs such as health care and other insurance.
- Manage vehicle expense and be creative. If you have more trucks than you need, it may not make sense to sell them. If so, consider parking some of them and reducing insurance, tags and other related expenses.
- Make sure materials are delivered to jobs and avoid crews visiting suppliers.
- Don’t let crews drag out jobs waiting, thus ensuring adequate work is available. Instead, reduce your workforce and demand production.
CollectionsAs business slows, cash is king. Customers that you have worked with for years may suddenly become slow payers. Develop a simple collection policy and stick with it. This includes things such as timely billings. Have one person in charge of calling and chasing money. Know about lien laws and other legal issues, and protect yourself. Review accounts receivable on a weekly basis.
You may want someone other than the person who sells jobs to collect money. Why? Well, if the economy is slower, they are chasing sales and collecting money may scare them. If they bother the customer, they tend to worry about losing the next sale.
In summary, remember that business health is much like personal health. What might not be an issue when times are good can be a disaster as the market tightens. A young man with a bad habit such as smoking may not have the immediate risk of a middle age overweight person. A fat business can do well in good times but might keel over in a tighter market. Now may be the time to get a checkup and start improving the health of your business.