As winter winds blow, where does my business go?
The more I sit and watch the flurries,
The more I have a belly full of worries.
Oh where, oh where did all my cash flow go?
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courtesy of ©iStockphoto.com
Cash flow has a way of misleading contractors. As early winter starts, most contractors are collecting large accounts receivables from work they have been trying to finish prior to winter hitting. Dependent on the area, October and November may be strong months with high sales, and as cash comes in from those sales, December cash flow looks pretty good. Next thing you know you are into the holidays with a lot of dead time and distraction. Come January and February, cash is beginning to run out. Suddenly, you are looking at little activity and no money. Welcome to contractor worry season.
Four Types of Contractors
So what do you do? Your strategy can vary according to the type of business structure you have. I have for many years used this business structure in my business lectures. Our networking groups have simply proven that this formula is powerful and true. Understanding your business strategy helps you understand your risk. The four business models I would like to discuss are:
1. The Professional Tradesperson: This company profile includes an in-the-field working owner who is still active in the trades. In our model the person charges a premium price, has no more than four employees and most sales leads are repeats and referrals. Since the company is small and charges a premium, they do not need a lot of volume.
In many ways, the Professional Tradesperson is the most recession-proof type of contractor. Of course they must charge a premium price and have an active customer list. Too many smaller, tools-oriented contractors charge too little and simply cannot make up the difference by working harder. As the market tightens they are already working themselves to death and more output is not sustainable. They were already stretched to their limits and slower times ultimately bankrupt them. However, if they were charging a premium, do some basic costing practices, and do a little marketing, all will usually be OK. Since the business is small, few sales leads are needed to make ends meet. Our networking group can quickly solve many of their business problems provided the owner is willing to change. See, for small businesses it is all about the owner. This company is molded in the owner’s personality and belief systems. Changing the business also means changing the owner, which may or may not be easy. For most it means just knowing what to do. Prior to getting this person into the networking group, I try to figure out what their issues and motivations are prior to getting them to cough up the money.
2. The Home Alone Contractor: This company profile does not include an owner who still works with the tools. This company has four to 10 employees, an inexpensive office and a part-time person to help with administrative work. Such companies usually work no more than three crews, so the owner can keep his or her fingers into all aspects of management. This company also must charge a premium, but they are developing overhead and require more volume to stay afloat.
The Home Alone Contractor’s vulnerability depends on the owner’s ability to sell and if administrative support is effective. A hot economy made it easy for many of these companies to win the job just by merely showing up. Now the market is tougher and selling leads is tougher. Repeats and referrals will not be enough to feed the organization, plus job sizes may shrink in recessionary times. It is also important that this company have good administrative support and job costing. Frequently the owner tries to do too much of the administration, and if the office has help, it may be a family member who does not have the time or skills to do all that is required. To make matters worse, most contactors are not good at running offices. This is one of the major reasons we do not allow competitors in our networking groups. We have found that by visiting other contractors these businesses can build better administrative structures.
3. The Owner-Driven Company: This profile requires an owner that is high energy and sales driven. Since the owner will spend much of his or her time selling, it is important to have a full-time competent office manager who runs operational details. The company also needs competent foremen who do not require babysitting. While this owner’s high energy drives high sales, it can also drive a demand for a high lifestyle that puts stress on the business cash needs.
I actually believe this profile is at least risk during a recession, provided the company sells at a premium and is operated efficiently. As a consultant, my first goal for this type of company is to put a structure in place to support the owner’s sales effort. We must make sure they are charging a premium and others help manage the details. If not, this high energy can create a lot of sales but no profits. Another risk of this type of business profile is that the owner is not as active and will react too late. This person loves the battle - you just have to make sure they stay in the battle and practice sound financial management.
4. The Contractor Management Team:This profile has an owner that is not very active in operations and others manage sales and field performance. This owner manages managers. The owner must carefully allot his or her time to the company’s most pressing needs. If the owner is more of absentee owner, the managers must be the go-getters that make things happen.
This profile is at the most risk during a recession. After 15 years of good times, many of these companies have a lot of cash in the bank. Plenty of cash flow can cause management to wait too long in making overhead cuts. Since larger businesses naturally change more slowly, aggressive financial advice is imperative. Such businesses can also include vested managers and entitled family members. Failure to respond can be disastrous.
In summary, don’t let the winter blues get you. Instead, try to make your current business model as efficient as possible. Review your structure and see what changes are in order. If you feel you are absolutely doing all you can, take some time off. Don’t sit around looking at four walls while pretending to do something that is going to change your business results.
