The downturn in the economy has been a challenge for most contractors, with many looking for business help. As we work to turn around failing roofing contractors, patterns begin to emerge. The following seven traits emerge in many of these organizations:
1. No monthly financial review. Each and every failing contractor ignored the importance of having a meaningful monthly financial meeting. Yes, many had poor records, but records only get better when you stop, briefly analyze them, question what is going on and seek answers. Contractors should review a monthly profit and loss statement, a balance sheet, receivables and payables. They should also review job costs and sales closing ratios.
2. Recording customer deposits as sales. Many of these failing companies had cash in and cash out financial mentalities. To make matters worse, they recorded a customer’s deposit as a sale when it was put into the bank. Customer deposits are not income and should not be recorded as “cash and a sale” but rather as “cash and a liability.” Until the work is performed, the customer has merely “loaned” or “prepaid” you the money. In some cases, this deposit was as high as 33 percent. This gave the illusion of company profit as they were taking gross profit on future sales prior to doing the work. Worse yet, they are using money that was not theirs and committing fraud by using customer deposits to pay for work performed on someone else’s job.
3. A sales marketing solution. Almost every failed company’s culture was to sell, sell, and sell. The solution to all problems was more volume. Some companies were actually profitable until they took on this sales-driven expansion with little or no control over finances. The culture was to grow to make money, not make money and use that money for growth.
4. The illusion of guaranteed profits as salespeople were commissioned and work was performed by subcontractors. Paying salespersons’ commission only can create a false sense of security. Even if the salesperson uses a price sheet, jobs can be measured short with extras and complications left out. Even punishing the salesperson by withholding commissions does not ensure the salesperson is competent.
Most subs working for roofing contractors live from hand to mouth. Yes, you are controlling per unit cost, but don’t assume you are controlling all of your liability. Callbacks, leaks and other liabilities come out of your pocket as they are the only pockets with any money in them.
Overhead was one of the main culprits in each company. Just because you pay a flat rate for sales and subs does not mean you have recovered all of your overhead costs. You still must know your overhead, price accordingly and make sure you have enough volume cover it.
5. Incompetent employees and advisors. Just because someone has an impressive sales manager or production manager résumé does not mean they are going to do a good job for you. These people still have to be managed and their costs built into your overhead structure.
Contractors can also receive poor advice from former corporate executives, bankers, etc., who are now consultants or looking for permanent management employment. Being smart and well educated and formerly employed at a large business does not ensure you know how to advise or manage a small business. In some of these companies we witnessed poorly targeted advice that helped contribute to the business’s failure. The advice was well meaning but did not take into account the nature of contracting or the limitations of the particular business.
6. Prideful owners in denial. The owners were all in some form of denial. Some did not reach out sooner because they were prideful and thought they could fix it themselves. Others had a long history of denial and only came forth when they bottomed out and had no choice. Several heard me speak and reached out, not realizing the true gravity of the situation until one of our consultants showed them. Optimism and denial are close cousins. Optimism is hope with a foundation of facts. Denial is hope with a foundation of fiction and false beliefs.
7. Good times and volume hid the problems. The U.S. economy enjoyed massive growth from 1991 until the recent recession. Such growth and increases in volume hid the inadequacies of many businesses. But these companies’ business inadequacies were in place long before the recession.
As the economy has faltered, running your business blindly simply does not work. Many of these businesses will fail. Some economists contend this is the way of capitalism - the good survive and the weak die out. Maybe so, but a lot of good people are going to suffer because of mismanagement. All of these owners meant well, were honest and never intended to cause themselves, their families or their employees hardship. If you would like some third-party insight into your business, call me; I would be happy to talk with you.
Join Monroe Porter at Best of Success
Monroe Porter will speak at Roofing Contractor’s Best of Success conference in Clearwater Beach, Fla., Sept 26-27. For more information about the event, visit www.bestofsuccessconference.com.