There is no question we are in uncertain economic times. One of our motivations for starting a small business was to control our own destiny and to be our own boss. Currently, we are uncertain which direction to take, and it makes us uncomfortable. This is a natural feeling; wandering in the dark makes everyone nervous. However, things are not as hopeless as you might think.
Your business represents the core income producer that has generated past wealth and will generate future wealth. Not only that, your contracting business is a place where you can work to control your own destiny. Numerous September 2010 investment articles talk about how there has been no gain in stock market wealth from 2000 to 2010. Just like many other people, contractors have watched their house and 401(k) values plummet. But unlike the poor working schmuck around the corner, your business is something you can control. No one said it is going to easy but believe it or not, you are still in control. Yes, there is pressure but when has there not been pressure on small business owners?
Here are some areas to look at:
• Overhead: We can complain about overpaid workers, materials, etc., but the simple reality is that if sales or margins drop your overhead cost increases. For many contractors, the owner’s salary is probably the largest item of overhead. Let’s keep it simple: if sales were $600,000 and fixed overhead including owner’s salary is $150,000, overhead is 25 percent ($150,000 divided by $600,000). If sales drop to $500,000, overhead is now 30 percent ($150,000 divided by $500,000). A 5 percent increase in overhead might not seem very high, but with prices and gross profit dropping, it is a huge issue. Another way to look at this might be with field production hours. Suppose your overhead is $150,000 and you have 15,000 field hours. That is $10 an hour for overhead. If field hours drop to 10,000, that is a $5 an hour increase. For the larger contractor, the numbers are merely larger. We worked with a contractor whose sales dropped dramatically and their overhead (not including wages and material) increased from $17 an hour to over $35 an hour. Making overhead cuts, no matter how painful, is the only option.
• Lifestyle: Your upbringing, your age, your personality, your spouse’s spending habits and numerous other factors determine your personal income needs. By all means you should work to live, not live to work. However, your salary is one of the largest expenses the business has and if the business fails, everyone loses. Contractors work hard and the guilt of those long hours can make it hard to say no to family, but if you don’t have the money, you don’t have the money. Yes, being late for all those family dinners was not good but going bankrupt in the business is not going to compensate for that. Since the market is down, it might not make sense to sell that second house but you can still adapt. Make a personal budget the business can live with and follow it. Share this article with your family and let them be mad at me instead of you.
• Family, owners and perception: As a big, strapping football-playing teenager, I worked summer construction jobs because they paid well. I still remember the owner driving up on the job in his Mercedes and screaming at us because the job was over budget. Being a dumb teenager, I quickly stepped it up a notch and the foreman said, “Slow down, son, it’s hot out here. When that blank-blank jerk sells that shiny new Mercedes, we know we are about to lose our jobs. Until then, no one on my crew is going to drop dead digging holes.” I suspect things are the same way today. And after 30 years of being in this business and seeing thousands of foremen, I still think that guy was a good, productive foreman. It is all a matter of perspective. If you have family members not pulling their weight, if you are taking excess hours off or showing off your wealth, don’t expect employees to get it. Plundering contractors are going to dry up and wither away.
Frankly, lots of folks don’t get it, and the economy is an easy scapegoat. There are three other small businesses in my office building. Their businesses are established but really slow, yet I am frequently the first one in the building and the last one out. Business is not forgiving. Bitching about the government won’t help. Only you can control your attitude and you have a moral obligation to adapt and lead your business in this new market. Your family, your employees and your customers are counting on your leadership.
• Upstart and newer contractors: Contractors ask me when is the economy going to get better and my reply is when some of the folks who don’t have a clue go broke. Good times let a lot of folks become contractors who normally would not have been able to enter the market and run such sloppy businesses. Do you know what it cost you per hour to operate? Do you know how many hours a week you have to produce and at what prices to break even? If not, you are not going to make it. Do you job cost each job and know what the numbers mean? Building your business is hard work and takes time. New businesses don’t have the name brand and repeat customers to fall back on. Foolish mistakes and running the business blindly is going to kill the business. A sign of trouble for younger businesses is when they grow to the point the owner is no longer on the job as a craftsman; they have lots of business, but no money. Blundering contractors are going to die out by the thousands.
• Banks and cash flow: Contracting is a nasty word for most bankers and lending has reached record levels of stinginess. Too many contractors have used a line of credit to fund their business growth and banks are calling them in. Even if you have had a relationship with a bank for 20 years, don’t be surprised if they call it when it comes due. You can no longer use your home or office building as a bank. Simply securing a second mortgage and lending the money to the business may not be an option. Banks are terrified of owning real estate and borrowing against real estate is not what it used to be. Look for alternate lines of credit prior to yours coming due. If cash is tight, avoid jobs and customers who have slow pay cycles.
In summary, all the rules have changed but you are going to be just fine as long as you adapt to the market and avoid denial. If you need some direction, call me at 800-864-0284; I offer 20-30 minutes free consulting to everyone that calls.