Growth Planning is Critical for the Modern Contracting Business.
Last week we lost a customer. While customer churn comes with the industry, losing a customer for any reason always hurts. But this was the kind of loss that hurts the most. The customer went out of business. As the owner of a company that helps small businesses stay “in business,” this represents the ultimate loss. Sadly, they had only signed up a few months ago. They were in a huge growth spurt that was going to triple them in size over the next year. We were training them on our system to help them dial in their workflow process. Everything was going well. Suddenly, the bottom dropped and we got the call that they were under.
So what happened? In the midst of the current economic boom, when opportunities for contracting businesses have never been better, how did a once thriving company go out of business so quickly? Answer, they did not plan the execution of their own growth. They couldn’t manage the faster pace.
Here’s what happened to my customer. Like many small shops, they were enjoying the uphill ride with steady streams of work coming in the last 18 months that had quickly taken them from a two-man shop to a $500K business with a couple extra workers. The quality of their work caught the attention of some larger developers who took them on for some bigger jobs. Suddenly their $500K company became a $1.5 Million company. That’s awesome, right?
Unfortunately, things got off to a bad start and continued to get worse. Details and oversights that could previously be absorbed at the company’s smaller operating size were far more harmful with more work on the table. These initial errors, combined with disorganized planning and execution led to the fatal imbalance between receivables and payables that quickly drives a small business into the ground.
Weak Contracts – Jobs were initiated without proper documentation. Work was being performed without signed contracts or in worse cases, signed documents that went missing.
Underfunded – They took small deposits on the jobs. This immediately created a cash deficit. To complete jobs in timely fashion, they needed to purchase a bulk of the materials up front. This forced them to max out their own lines of credit by making purchases up front. With their own receivables going into their customers’ 30-day pay cycle, they had no cash or credit to purchase the materials they needed. They were frozen.
Labor Shortage – They accepted opportunities that over-utilized their available workforce and were not able to find experienced workers on their own. They recruited an agency to provide them with workers. This is where things went bad quickly. Many workers lacked proper experience. Jobsites lacked proper management and work instructions. Workers were over-reporting hours to the agency while failing to track labor and materials through my customer. A dispute arose between my customer and the agency over invoice amounts and quality of work.
Delayed Invoices – Meanwhile back at the office, outgoing invoices were delayed by the scurry to track down missing time sheets, materials invoices and other billable expenses. Invoices were not getting out on time and were also missing billable items that were lost.
All of this, compounded by the usual wheels of delay for collecting receivables in the contracting industry created the hammer that fell upon my customer. Only 3 months after their massive growth spurt initiated, my customer was under water. They were in a dispute with a labor sourcing company, they couldn’t order materials because their credit line was maxed out and they couldn’t collect on invoices fast enough to pay their own bills. Eventually this included payroll.
While the future is always unpredictable, these are great days for contractors. Work opportunities are abundant and there is more work than there are workers. A contractor with work experience and a few good contacts can quickly get a business running and long-standing businesses can enjoy solid growth during this period of prosperity. The critical elements for navigating this growth are planning. In today’s fast moving pace, these two things have never been more important for growing businesses, especially in contracting where delay and oversight can quickly put a company in dire straights. With planning and strategy comes a reliable workflow process that protects a company’s best practice, connects office and field operations and keeps work moving on pace. In the case of my customer, simple things like the following could have delivered a much different outcome:
- Solid Work Agreements – Work agreements that clearly define scope of work but more importantly, establish proper requirements to protect the project for both parties.
- Proper Funding – Bigger projects require more funding up front to ensure that labor and material costs are covered through the next invoicing cycle.
- Own your Labor – The shortage of experienced, skilled labor is a nationwide challenge. Outsourcing labor is always a gamble for what you are going to get but if you have to, take ownership of the environment and the process that will guide your workers. Experiment with outsourcing before you jump in headfirst.
- Real-Time Tracking – During periods of rapid growth, an efficient job tracking process is critical. Modern technology allows for the real-time tracking of labor hours and material costs. Every day you wait for playback is another day you have to sit on invoices. Every item missed is an item that you pay for without getting paid. These both conspire to kill your cashflow and in the case of my customer, kill your business.
In times of prosperity, it’s easy to get on the fast track for growth. Whether your starting a new business or trying to take your current business to the next level, strategy and planning are the common denominator for survival and healthy growth especially when work seems to be flying in through the window. Right around the $500k revenue marker, the need to define your business process becomes an absolute must in the success equation. The small things that you used to manage between a few people become critical items that require a reliable process for maintaining healthy profit and cashflow that will keep you growing. Most importantly, addressing this issue early in the game before things get hectic will keep you driving in pro-active mode instead of the toxic reactive whirlpool that my customer fell into.
Start planning your future today. Here are some simple questions to ask yourself.
- If your business doubled tomorrow, what are the top 3 things you would need to navigate growth?
- Name 3 things that negatively affect cashflow. When or where (in the business cycle) do they happen and what actions could you take to solve them?
- What is your Labor Efficiency Ratio for your current workforce (Simple formula is gross 12 month revenue divided # of billable workers)? What percentage of your labor hours are billable. If your workforce doubled, would you stay profitable as other expenses rose.
- How do you track your time and materials? How long does it take for this information to get back to the office.
- What are the top 3 pain points of your business? In an ideal world, how would you solve them?
I was sad to lose this customer. I met them. They were good people and that’s the hardest part. Like too many others they entered into a faster paced game without a plan and then waited too long to address their problems.
Addressing and solving business challenges today when they are small and manageable will keep them from becoming much bigger and toxic problems down the road. If you take time to solve them now, you will pave the way to prosperity and profits down the road.