With a slower market, more contractors are calling me asking for advice. Having been in the business a while and having gone through several slowdowns, I would like to offer answers to some of the common questions that contractors ask and issues they might face.
1. Do you think there is a slowdown and how long will it last? There is no question the market is slower, but it really is a regional issue. Areas that experienced the largest housing price increases are the areas with the greatest slowdowns. California, Arizona, Florida, and Northern Virginia are just a few of these regions, and there is no question that the housing crunch is seeping into all areas. There is no way to know how long it will last or how deep it will go. However, it is important to understand that we are the wealthiest nation in the world and people with money are not just going to stop spending it. However, as they grow older they may choose to spend it differently. As a business owner you must assume the market will not quickly turn and save you. You have to take steps to save yourself. In areas where housing is hardest hit, the real estate industry has statistics on housing inventory. These can be helpful in predicting your market area but only with regard to housing.
2. What types of contractors suffer most in a slower market? This is a fairly complex question without a simple answer, but here are some of the more common issues and types of contractors. Mature contractors who are unwilling to change with the times are particularly vulnerable. They may have more people with tenure, many of whom are loyal and hard to let go. They also may have built an organization that is more production then sales driven. The original owner was probably a great salesperson and hustler. He or she was a true rainmaker. However, in many cases, this person is now in his or her 50s surrounded by people who are great employees but not as dynamic. When times are tough, someone has to step up and make things happen. The original owner may still be able to make things happen, but there may not be enough of him to go around. As business owners and people within an organization mature, change can be harder to accomplish. With our PROSULT networking groups, I have always found a fire-eating 30-year-old quicker to change than a still-at-it 55-year-old. It does not mean the mature company will not change, but the pain may have to be fairly great before any significant movement can be made. This can be a very expensive proposition.
Lack of diversity can also make contractors vulnerable. Performing only one segment of work such as new houses is obviously a killer in today’s market, but it goes deeper than that. Suppose over 25 percent of your work was for one customer; if that customer cuts back, you are in trouble. Or possibly you do little advertising and most of your work is by word of mouth. With a slower market, word of mouth may not be enough to make the phone ring. Or possibly your business has matured and your customers are dying off with no new ones to replace them.
Brand name is crucial when competing in a slower market. Without a strong brand name, everything is about price. The problem is that it takes years to build a strong brand name. The home builder type subs that did not even have their name on their trucks can only “buy” work by lowering their price.
3. Should I cut my overhead now? Probably, but you can only decide that for yourself. By nature, contractors are entrepreneurial and optimistic. Most contractors tend to wait too long prior to reducing overhead. They hope to sell their way out of a slower market but that may be an unrealistic approach. Remember every dollar cut means a dollar saved. Every dollar sold only becomes profitable if the job is performed as estimated and the accumulated gross profit from all the jobs is enough to cover your overhead.
4. What are some of your ideas for cutting costs? Start with a line-by-line budget and evaluate your costs, where you can cut, etc. Yes, it may be painful, but it is better for some people to suffer than for the business to close and everyone to lose their jobs. If your business is seasonal, be sure to compare last year’s numbers to the same time frame this year. Office and overhead salaries are probably your biggest item. Can some of your estimators and production supervisors be shifted to billable hours in the field? Many of your employees were promoted from the field - can some be delegated backwards to their old jobs? Tell people this is a temporary situation. Look at sales and make sure people are doing their jobs. If you have unused trucks, remove the license and insurance and consider selling them, provided you can do so at a fair price. Look at downtime and make sure field employees are getting out of the shop on time in the morning. Each situation is different. Call me at 800-864-0284. Offering 30 minutes free advice is how I find people for our networking groups, and in the long term a good investment of my time.
5. With all the gloom and doom, how can I remain positive? This being an election year, the gloom and doom is probably going to continue. Recessions are a natural business occurrence, not the end of all times. Think of it as a market adjustment. Since the early 90s we have experienced the longest period of economic growth in U.S. history. It has been fairly easy for your competitors to succeed even if they ran a poor business. Think of this as a weeding out cycle and once this cycle is complete, you will be in a great business position.
6. What should I be doing as a business owner? Exhibit leadership and be realistic. However, don’t panic and be negative. Your employees are looking for leadership - someone to show the way, not preach gloom and doom. Also, make sure employees see your sacrifices. Don’t be a seagull by showing up at the shop in a nice car and squawking at people. Your employees want to know that you are in the battle with them.