Six key business lessons we learned over the past year.

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What is that, you say? Kind of a strange headline, considering 2009 was not a year to remember for many contractors. Let me tell you what I mean.

A couple days before Thanksgiving, I was sitting around a table with a bunch of Nexstar members discussing the year that was 2009. Each contractor was discussing the highs and lows in their business, including what worked, what backfired, etc. It was an interesting conversation. Many positive business improvements were shared, as well as a few laughs at the inevitable “I can’t believe I was so stupid” mistakes.

A thread of optimism carried through it all. There was a general consensus that each company was prepared to have a much better 2010 due to some of the changes management had made in 2009. Forget the economy - even if things stay as they are, they felt better about the coming year.

It seems that the latest economic downturn, although painful, had forced these owners to make decisions and manage their business in a completely different and better way in 2009. Each company was poised to have improved performance due to their actions. Very cool!

After the meeting broke up, I had a one-on-one conversation with one of these owners. He had made some changes to his business in the last two years that kept his doors open, including: dropping new construction builders; eliminating virtually all of his remodeling business; changing pay plans for his service technicians; and some major shifts in advertising spending. Each change was a major departure from business-as-usual at his company. The result is a smaller but healthier company that makes money and has paid off the debt generated during the “better times” earlier in the decade.

He made an interesting comment: “Hard decisions are easy to make when you have no other choice.” Hmm… In other words, he really had nothing to lose. His company was headed for bankruptcy if the trajectory of his business did not dramatically change, so the pain of change was less than the pain of staying the same.

I think that comment was true for many contractors in 2009. Hard economic times forced business owners to consider business options and initiatives that would not have been acted on when times were good. Not because they are not worth the effort, but because they require so much effort and, let’s be honest, some risk.

If your company has come through the latest economic downturn without crippling debt, you have undoubtedly made similar changes to your business. The challenge will be to make sure that the invaluable changes and lessons learned in the last 18 months are not reversed or forgotten when the economy starts to pick up and the phone starts ringing again.

What are those lessons learned this year that should not be forgotten? Here are some that may sound familiar to you.

  • Lesson No. 1: Cash is king. A company’s assets need to be heavily weighted to cash on hand - not in receivables, inventory, dormant trucks and tools.

    When hard times hit, companies zeroed in on reducing receivables by tightening up credit policies and hitting the collection calls hard. Hey, they needed the cash to pay bills.

    In addition, inventory levels were reduced (not immediately reordering stock used from inventory) - especially in the warehouse, where many contractors took great pleasure in buying all kinds of nifty parts during heady times (contractors take great pride in an over-stocked warehouse for some reason). Purchases of the latest and greatest tools and equipment were pushed off or used tools were purchased instead.

    A funny thing happened from all these activities - sales were not affected and cash was conserved. These activities designed to generate and maintain healthy cash balances should be continued when the economy is moving and we can breathe again when looking at our bank balance.

  • Lesson No. 2: Timely and accurate financial statements. This past year more than ever, companies started to watch their income statements like a hawk. Actually, what happened for many companies is they actually produced income statements and balance sheets for the first time and started to review them.

    When money is tight and every dollar matters, you tend to pay attention. Not so much when times are good.

    Let’s keep this important lesson top of mind when the bank balance starts to grow again. “Thou shalt produce a timely and accurate monthly income statement and balance sheet, and read and interpret them like ancient scrolls” is a business commandment to be followed even in the best of times.

  • Lesson No. 3: Money is made in the field with great technicians. When the work dwindled, cuts in the field were made. Marginal technicians and helpers were laid off. What work remained was being performed by the upper-end technicians who were better at sales and installations. The result was improved gross margins (sales minus direct labor and material expense equals gross margin).

    Declining revenues are not a good thing, but culling back to the most productive employees and expecting them to do more of your work can be. New standards of performance are then created so that when the revenue levels return with the expanding economy, the company now has a higher standard that newly hired employees must meet. That is a very good thing.

    In our business, money is made with great field employees. When the calls start to flow again, it should be every business owner’s mandate to hire only those with outstanding potential, and then train and expect great things from them. Which leads to office employees…

  • Lesson No. 4: Expect great things from office employees. Many, if not most, companies had to make office staff reductions to keep the company in the black. Whenever staff reductions are contemplated, it is virtually impossible to even imagine getting the work done with fewer people. “Everyone is busy, working long hours!” “We can’t possibly get by with less!” I am sure you heard it, thought it, perhaps even said it. But your income statement is a tyrant and declining sales and losses demanded it - so the hard decision was made and people were let go.

    And it was no fun. It was terrible. Long faces, tears, poor morale was the business norm for a period of time. Then a funny thing happened. People stepped up and got the work done. What was deemed to be impossible to do, over time, became possible even with a reduced staff. Sure some compromises had to be made. In some cases business processes had to be improved (or even created) - which is a great thing!

    When the revenue starts flowing again and the bank balance starts to creep up, it will be tempting to quickly add overhead staff to get things “back to normal” again. Even in good times we should be quick to analyze the true business need for any incremental hire that adds to your overhead. Let’s be smart, even if we have the money.

    A great lesson from this economy is that people are likely capable of more than you think - and are willing to do more than you think with the proper motivation and support.

  • Lesson No. 5: Not all customers are the same. Many of us got the dreaded call from a general contractor or home builder or home warranty company at exactly the wrong time. Sales were declining, losses were mounting and then one of your biggest (notice I did not say your best) customers called and said if you want to continue to do business with them, you’d need to sharpen your pencil. They wanted a 5 percent or 10 percent price reduction. The same new construction house, the same home warranty call, but this year you have to do it for less.

    You remember all the calls from this builder over the years at 4 in the afternoon telling you how much they needed a plumber on site at 7 the next morning to keep the project moving. Never mind that you already had the day scheduled and this throws things all off for you. You did it, many times - even paid out big-time overtime wages to keep their projects moving and their customers happy. All the sacrifices you made for this customer over the years come down to this: You have to cut your prices immediately or the work shuts off.

    Of course, you do what you have to do in the moment with no other options. But remember this when the work picks up again. What kind of customers do you want to build your business around going forward? Is it a home warranty company that cut your fee and would do so again at a moment’s notice if it were offered a lower price? Or someone who appreciated the tenured relationship your company can bring, along with value-minded residential and commercial service customers?

    Remember to pick your customers wisely as the work increases and build your revenue foundation on solid ground. The economy will rise and fall; who you do business with will determine how far (or if) you fall the next time the economy inevitably falters.

  • Lesson No. 6: Be a strong, decisive leader. While there are many, many other lessons that the last year should reinforce, this is the last one I will cover, which is to maintain strong leadership. The past year forced many owners to become more vocal, more aggressive, more passionate about their business. Important decisions could not be delayed any longer and action was taken. Employees that were dragging down morale and production were dismissed.

    When decisive action is taken, your employees and customers take notice. They care more when you care more. They work harder when you work harder. When the good times return, don’t use it as an excuse to return behind the closed door or to re-establish the Tuesday and Thursday afternoon golf outings. Remember, the same leadership is needed and your people will respond during good times. And instead of just getting by, your company and your bank account will flourish.

    2009 is over. For the wise, it will be looked on as a great year - even if their business suffered.

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