Measuring Up: Is Diversification the Right Decision for Your Roofing Business?
Roofing contractors are notorious for their entrepreneurial spirit and willingness to take risks. Each and every day they bet on the rain and many other risk factors. Taking on new types of work might be tempting, but diversity may not equate to more profits and success.
Roofing contractors are notorious for their entrepreneurial spirit and willingness to take risks. Each and every day they bet on the rain and many other risk factors. Taking on new types of work might be tempting, but diversity may not equate to more profits and success. Trying to be everything to everybody might mean you end up being nothing to nobody. Expansions are best undertaken when they match your core competencies. The problem is that a contractor’s entrepreneurial nature, a desire to please customers and a false illusion such as expansion will increase profits can cloud one’s judgment. When expanding, consider the following potential pitfalls:
• Diversification and expansion require capital. Don’t erroneously think bigger is more profitable. Expansion of your services is not going to automatically make you more money. Profits alone may not fund your expansion. If your business is unprofitable, fix what is wrong with your business, become profitable and then use those profits to fund growth. If you were not profitable at $500,000 in sales, buying another piece of equipment or adding an additional service is not going to make you more profitable. My age old adage is to make money and use it to grow -- don’t try to grow to make money. Whatever you do not do well in your business will just magnify itself with growth. Growth requires more sales, more production capacity and more cash.
• Stick with the size and type of jobs your organization can handle. It is natural to think bigger is better. Shifting from residential to new construction can be particularly dangerous. Remember that when you deal with homeowners, you are dealing with the person who is ultimately going to own the project. When you work with a general contractor or builder, you are working for someone who is an agent of the owner. In reality, quality to a general contractor is on time, within budget and no owner litigation.
Be careful of new commercial construction, particularly if those projects are low bid. You can suddenly find yourself in a sticky contractual situation with poor cash flow and other issues you are not familiar with dealing with. Retention and receivables increase as job sizes increase. Make sure you have enough cash to front the project.
Also, remember that it is very difficult to control new construction schedules and roofing is a key critical path component. When a GC needs a roof on a project, they don’t want to wait around. Generally, it is easier to delay a re-roof schedule by providing a few patches and sweet-talking the owner.
• Make sure you have the time to dedicate to the expansion and the personnel to help you. Learning new skills takes time, patience and costs money. Time and time again I have seen contractors who hired “the magic foreman or manager” to oversee the expansion only to have it all blow up. Good people are already employed and finding new ones is hard. Hiring a new person may work out great but you should be prepared to jump in and fix it.
• Understand roofing and other types of work may be driven by different success factors and core competencies. Every organization is better at some things than others. Expanding within your competency is much easier and less risky than learning new skills and establishing a new culture. What would you say is your organization’s strongest area, sales or craftsmanship? If you are a sales-driven organization and sub out much of the work, you may want to be careful of expanding into areas that are more technically challenging. If your organization thrives on technical challenges, you might want to pursue this type of work.
Another interesting point is that roofers work on the top of structures where customers have little chance to interact with the crews and closely inspect work. It is logical to focus on expansion that is on the exterior of the building. This is particularly true of consumer work. Taking an outside crew into a home with expensive furniture and fixtures is risky. With inside projects, drug testing and background checks become even more important.
Not all products have the same foundation of craft abilities. Both residential and commercial contractors might see siding as a natural area of expansion. Remember that you are at ground level and customers can inspect work and interact with the crew. Coatings might seem like a no-brainer until you realize coating failures are caused by preparation issues, a specification painters are more accustomed to dealing with.
• Establish a realistic volume target. Knowing how much volume you need to do to make the expansion work is a key ingredient. How much volume will you need to perform until you can justify a dedicated manager or crew and how you will you get the work managed in the meantime? Establish a minimum and maximum time frame and budget.
• Don’t overspend on equipment and facilities. Yes, you like shiny stuff and in your mind, it is cheaper to own than to rent. However, spending a lot upfront money in an area you may not succeed or want to stay in does not make sense. Rent equipment and ease into capital expenditures.
In closing, diversifying can be a key ingredient in business profits but expansion should be carefully planned and budgeted. Don’t let your entrepreneurial spirit get you into a business you have not fully thought through.
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, see pages 50-51 and visit www.bestofsuccessconference.com.
Roofing contractors are notorious for their entrepreneurial spirit and willingness to take risks. Each and every day they bet on the rain and many other risk factors. Taking on new types of work might be tempting, but diversity may not equate to more profits and success. Trying to be everything to everybody might mean you end up being nothing to nobody. Expansions are best undertaken when they match your core competencies. The problem is that a contractor’s entrepreneurial nature, a desire to please customers and a false illusion such as expansion will increase profits can cloud one’s judgment. When expanding, consider the following potential pitfalls:
• Diversification and expansion require capital. Don’t erroneously think bigger is more profitable. Expansion of your services is not going to automatically make you more money. Profits alone may not fund your expansion. If your business is unprofitable, fix what is wrong with your business, become profitable and then use those profits to fund growth. If you were not profitable at $500,000 in sales, buying another piece of equipment or adding an additional service is not going to make you more profitable. My age old adage is to make money and use it to grow -- don’t try to grow to make money. Whatever you do not do well in your business will just magnify itself with growth. Growth requires more sales, more production capacity and more cash.
• Stick with the size and type of jobs your organization can handle. It is natural to think bigger is better. Shifting from residential to new construction can be particularly dangerous. Remember that when you deal with homeowners, you are dealing with the person who is ultimately going to own the project. When you work with a general contractor or builder, you are working for someone who is an agent of the owner. In reality, quality to a general contractor is on time, within budget and no owner litigation.
Be careful of new commercial construction, particularly if those projects are low bid. You can suddenly find yourself in a sticky contractual situation with poor cash flow and other issues you are not familiar with dealing with. Retention and receivables increase as job sizes increase. Make sure you have enough cash to front the project.
Also, remember that it is very difficult to control new construction schedules and roofing is a key critical path component. When a GC needs a roof on a project, they don’t want to wait around. Generally, it is easier to delay a re-roof schedule by providing a few patches and sweet-talking the owner.
• Make sure you have the time to dedicate to the expansion and the personnel to help you. Learning new skills takes time, patience and costs money. Time and time again I have seen contractors who hired “the magic foreman or manager” to oversee the expansion only to have it all blow up. Good people are already employed and finding new ones is hard. Hiring a new person may work out great but you should be prepared to jump in and fix it.
• Understand roofing and other types of work may be driven by different success factors and core competencies. Every organization is better at some things than others. Expanding within your competency is much easier and less risky than learning new skills and establishing a new culture. What would you say is your organization’s strongest area, sales or craftsmanship? If you are a sales-driven organization and sub out much of the work, you may want to be careful of expanding into areas that are more technically challenging. If your organization thrives on technical challenges, you might want to pursue this type of work.
Another interesting point is that roofers work on the top of structures where customers have little chance to interact with the crews and closely inspect work. It is logical to focus on expansion that is on the exterior of the building. This is particularly true of consumer work. Taking an outside crew into a home with expensive furniture and fixtures is risky. With inside projects, drug testing and background checks become even more important.
Not all products have the same foundation of craft abilities. Both residential and commercial contractors might see siding as a natural area of expansion. Remember that you are at ground level and customers can inspect work and interact with the crew. Coatings might seem like a no-brainer until you realize coating failures are caused by preparation issues, a specification painters are more accustomed to dealing with.
• Establish a realistic volume target. Knowing how much volume you need to do to make the expansion work is a key ingredient. How much volume will you need to perform until you can justify a dedicated manager or crew and how you will you get the work managed in the meantime? Establish a minimum and maximum time frame and budget.
• Don’t overspend on equipment and facilities. Yes, you like shiny stuff and in your mind, it is cheaper to own than to rent. However, spending a lot upfront money in an area you may not succeed or want to stay in does not make sense. Rent equipment and ease into capital expenditures.
In closing, diversifying can be a key ingredient in business profits but expansion should be carefully planned and budgeted. Don’t let your entrepreneurial spirit get you into a business you have not fully thought through.
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, see pages 50-51 and visit www.bestofsuccessconference.com.
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