It’d be great if the economy (and your business) chugged along at a steady, predictable pace with no surprises or slowdowns. Great indeed, but entirely unrealistic. The world is going to throw you curves and it’s best to treat them as the rule rather than the exception. Slow periods are just as normal as moderate and red-hot ones and while you can’t control these external gyrations, you can control how you prepare for and react to them.
Why long term projects seem so hard: I know. You’ve sat down a hundred times to work on long range stuff like strategic plans, forecasts and such and had trouble finishing them. Most people have the same experience for the very good reason that we’re hard-wired for daily survival instead of long-range anything.
Humans have a natural tendency to perceive whatever’s going on around them at the moment as being far more important than it really is. This stems from the fight-or-flight response that makes surviving the impending lion attack far more important than figuring out where the tribe will spend next winter. When we lived in the jungle this ultra-short focus made sense but the day-to-day operation of a remodeling business simply doesn’t involve continual threats to survival. This, however, doesn’t stop most contractors from immersing themselves in the daily details as though the sky would fall without them.
I harp on this because every strategy that follows will require you to think and act from a long-term perspective and make investments now that will pay huge dividends, but not immediately.
Had enough psychology? Okay. Let’s get down to the nuts and bolts of surviving (and even prospering) during economic downturns.
Hurricane? What hurricane? When the water’s already rising, it isn’t a great time to start thinking about a flood-escape strategy. Any decisions you make in reaction to an immediate threat are likely to be disproportionate, ineffective and/or damaging because there’s no time to consider all the factors and options. Think back on how many not-so-brilliant decisions you’ve made in the heat of battle. Plan to invest time and energy in a planning process.
Understand your business: To create effective contingency plans you first need to know in detail how your business works from both an operational and financial perspective. What’s your breakeven revenue with current overhead expenses? How about if you cut overhead by 30%? What business segments are most profitable? Which cause the most callbacks/warranty issues/delays? How are your Receivable and Payables running? Don’t know? Time to learn.
Create Contingency Plans: The objective is to create two or three operating plans that will allow you to rationally scale down your business during a downturn and remain solvent and/or profitable. Once created, these plans are on the shelf and ready to go if and when needed. If business drops to level “x” for 90 days, we go to Plan 1. If it drops to level “y” for 90 days, go to Plan 2, etc.
Each plan includes a detailed manpower, equipment, overhead, pricing, cash management and expense structure that have been analyzed to insure they’ll produce predictable results at various revenue and profitability levels.
Because your business is comprised of many interdependent parts you’ll be doing lots of “what-if’s” before you come up with the right structures for your final plans. There are many possible combinations and different plans will be right for different contractors. What’s important is that you’ll be making decisions calmly, in advance,based on a clear understanding of their consequences rather than incomplete data, intuition, or fear.
We’ll talk about cash management later but here are several non-cash related strategies that will help position you as a survivor:
Be the Preeminent Player. If you’re stronger and more efficient than everyone else, you’ll be the last one standing in a downturn. This means having bulletproof systems, methods, and processes that insure that you can do the job better, at lower cost, higher quality, quicker, more dependably than anybody else. Darwin is at work in the business jungle too.
Hire the best. Bright, talented, top flight people are a scarce and valuable resource. They cost more in salary but they’ll give you more flexibility, creativity, and productivity (if you train and lead them properly) than Bubba and Earl from the temp agency. Aside from all these benefits, employees who are properly hired, trained, and paid will dramatically cut your turnover which is a huge (though often invisible) cost in both money and time. When things get tough, you want the best people around you (and not with your competitors).
Copy the Successes: Find the long-lived competitor in your area who’s made it through many ups and downs. Do some homework and learn what they do to survive, then copy them shamelessly. There’s no reason for you to be reinventing the wheel.
Diversify: Don’t go buy a winery, but investigate ways to use your existing expertise, equipment, and crews in new ways. If you’ve been exclusively working commercial jobs, look at residential. Working a tight geography? Try expanding your range. Doing only remodeling? Consider hooking up with some builders to do finish work. What’s critical is to analyze the alternatives and lay the groundwork ahead of time so you can pull the trigger when the time comes.
It’s about the Cash: When all is said and done, the most critical factors in determining your ability to weather an economic storm are cash and cashflow. When things are humming along it’s tempting to reinvest cash as soon as you get it but if you’re overextended when a slowdown hits you’ll be selling the trucks and tools to cover your payables and loans. It’s a balancing act to spend enough to advance your business while stockpiling cash as a buffer against downturns but he who does this best survives to hunt another season.
What’s enough cash? More is always better: the bigger your warchest, the longer you can survive (and sometimes prosper) in a tight economy. This will make your stomach feel funny but if you want to be around next season, you should be carrying at least enough reserve to carry through a full year of slow times. NOT doing this is a primary reason why small businesses fail: many are holding a month of cash reserve and at the first hiccup, they can’t meet payroll or pay the rent and they’re gone.
All of this leads back to understanding your business. You can’t figure out a safe cash position, for instance, if you don’t know your cash burn rate at various below-breakeven levels of operation. That is, if your revenues drop to 40% of normal, you’ll probably be running at a loss. Your cash burn rate is the monthly operating loss divided by 30 to get a “days” count. For example: losing $300K per month is $10K per day, and if you have $600K in your cash accounts, that’d mean you could make no expense cuts and survive 60 days before the cash ran out. If contingency plan A takes expenses (and monthly loss) to $210K, that’s $7K per day, meaning the $600K reserve would last 85 days. Eyes glazed yet? Don’t worry. It’s easier than it may look.
Prospering in the Downturns: When the slump hits and you’ve positioned yourself as a top-flight operation with a strong cash position, you’re at a huge advantage. As weaker competitors leave the market you have the opportunity to hire their best employees, take over their clients, even buy their equipment at fire sale prices. Like the strongest animals who survive the toughest winters, you’ll find less competition and a plentiful hunting ground as the economy improves.
Many successful businesses grew dramatically by taking over weaker competitors in slow periods and this may actually be a strategy you include as part of a contingency plan if you’re heavy in cash. It may sound harsh to and it’s your choice whether to exploit your competitors’ misfortune, but at least you’ll be in a position to choose.
“Okay,” you say “all this sounds great in principle but I’m already working 60 hours a week just fighting the fires to keep the place running. Where am I supposed to find the time to do all this?”
If that’s your situation, you’ve created an “owner-dependent” business that’s being constrained by your own time limitations and is probably driving you a little nuts. Many contractors fall into this trap because the trade skills that were the basis of their business in the early days are entirely different from the management and leadership skills that are needed as the business grows.
And, not surprisingly, businesses (and owners) that use all their energy keeping up with day-to-day firefighting are vulnerable to any bump in the economy. Your job is to not be one of them.
Win/Win/Win: Although this article has been about strategies for surviving an economic downturn, these techniques are identical to those we teach at Contractor’s Business School® every day, regardless of economic conditions.
Why? Because a highly systematized, owner-independent business led by a management-savvy, strategic-thinking owner is a powerhouse competitor, has no owner-created limits to growth, and has a leader with time to watch the horizon while others frantically fight fires. In good economic times or bad, these are the core of a successful remodeling (or any) business.
Jayme Dill Broudy is the founder and principal of Contractors Business School, a coaching, training and consulting firm specializing in helping contractors produce more profit in less time. Her programhelps owners work fewer hours, achieve peace of mind, and live a more balanced life. Since 1993, Jayme has worked with hundreds of contractors in many specialty areas to build successful stand-alone businesses. Visit www.contractorsbusinessschool.com or call 800-527-7545 to get the FREE CD "10 Key Strategies to Build a Business that Works."
