Economic Realities
You have to make difficult decisions to flourish
and grow your business, especially during tough times.
In my last column, we talked mostly in terms of surviving our economic contraction. Surviving is good, if you consider that the alternative is extinction. But mere survival is not fun. Consider Tom Hanks in the movie “Cast Away.” He survived, but I can’t say that he enjoyed the process.
Even during dismal economic cycles there are savvy business people who manage to flourish and grow. Flourishing, growing and being profitable is much more fun than just surviving. Let’s look at some of the ways to make lemonade out of this economic lemon.
To begin with, you will have to confront your cost of doing business. I know your eyes glaze over every time you see this mentioned in this column. The reason I keep mentioning it is simple: Every week I talk to contractors who haven’t a clue as to what their costs are. Our conversations often start like this: “Can you print me a price book based upon the prices in my area?”
Let me be very clear: It is almost 100-percent certain that the “going rate” in your area is not enough to cover your cost of flourishing, or even surviving, in this economy. If you choose to ignore this fact, then you can just stop reading now. If you are convinced that you have to price your services at the bottom of the “area price” just to stay busy, then I can’t help you, so don’t even call me.
If you think that being busy implies you have a good business, then remember: You can stay busy by simply balancing a stick on your nose and you’ll lose much less money in the process. Obviously, the market will put some limit on your pricing, but working for less than cost is self-destructive. This makes it important to know how low you can go and still earn a profit. The lower your price, the less wiggle room you have for squeezing a profit out of the transaction - so price wisely.
You can find different ways to phrase the question but keep this in mind: Your customer has to perceive value commensurate to the price of the services you offer. In many markets, your customers are cutting expenses also, so their value hurdle will be higher than before. If your selling price is bloated with unnecessary overhead, you will make it tougher to get over that hurdle. Ultimately, every overhead item has to help you get the sale before it can earn a profit, so set the hurdle high. By the way, have you ever seen a 300-pound Olympic hurdler? I didn’t think so.
Even though it sounds like a vanity expenditure, if your trucks aren’t distinctive and well-maintained, you should consider a face-lift. A handsome, memorable vehicle gives customers a reason to call. A shabby vehicle gives customers a reason not to call. Beyond the “rolling billboard” function of a good truck identity, your memorable truck enhances the other marketing efforts you use. If you spend thousands on a direct mail campaign but your trucks cause customers to second guess a decision to call you, then you have just flushed good money down the drain.
In a good economy, flushing money down the drain results in poor profits. In a challenging economy, fiscal flushing can put your whole company under water. Do the necessary body work on your trucks, get a fresh coat of paint and apply distinctive decals with your company name, logo and phone number.
Often when times get tight, one of the first management reactions is to cut bonuses. You may have heard, or even rehearsed, the “times are tight so no bonuses this year” speech. If you need to cut bonuses because business is slow, that’s probably a sign that your bonuses aren’t linked to the performance of your individual producers. Here’s another sign that your bonuses aren’t linked to performance: If you have to decide how much bonus to put in the envelope at the end of the year (or other period), then your bonus does not make business sense.
If you run your business by the numbers, then you will know how much production you need to see in order to break even. If you pay bonuses based upon those production goals, then deciding how much to pay is already calculated in the system. The best part of production bonuses is that they kick in once your operating requirements have been met - which means that any bonus money you pay out is coming from bonus money the employee has earned for the company. It’s all up to the numbers. And if you want those numbers to increase, consider increasing the production bonus a little.
In the event of a layoff, there’s never a pleasant time to do it but the sooner you do it, the better for all. Laid-off employees need to find work quick. If you lay them off as soon as you see the need, you may be able to pay them a stipend for a few weeks to give them time to find a new job. If you wait until the bitter end, that usually means you won’t have the wherewithal for generosity, so they get a cold, hard boot in the keister.
But there’s another casualty of economic reality. Some of your business associates will be going belly up. If they (or you) weren’t earning a profit in the good times, it’s almost certain that in tough times there will be no respite. We all have a right to try our hand in business, but there’s a big difference between that right and a guarantee of success.
When a company fails, its list of customers will still need service. If you can find a company that is struggling, you may have an opportunity to do it, its customers and yourself a favor by negotiating for its customer list. Use that list to stir up more work for your crew.
Pay the owner a percentage of sales and make those customers glad you found them. Let gross sales generated by the list set the selling price: Simply pay a fixed percentage of sales to customers on that list. Most likely, you’ll be paying less for these customers’ names than you would pay for advertising. At the same time, the seller of the list will be making more money off the list than he or she did running the business. Everybody wins in what could have been a total loss.
To flourish in this economy, scrutinize your costs more than ever before. You will have to make some hard decisions, but don’t strangle your business by cutting back on the advertising and sales budgets. No calls, no opportunities. No opportunities, no sales. When you do get an opportunity, offer plenty of options. The result will be better sales, better service and better profits.
In my last column, we talked mostly in terms of surviving our economic contraction. Surviving is good, if you consider that the alternative is extinction. But mere survival is not fun. Consider Tom Hanks in the movie “Cast Away.” He survived, but I can’t say that he enjoyed the process.
Even during dismal economic cycles there are savvy business people who manage to flourish and grow. Flourishing, growing and being profitable is much more fun than just surviving. Let’s look at some of the ways to make lemonade out of this economic lemon.
To begin with, you will have to confront your cost of doing business. I know your eyes glaze over every time you see this mentioned in this column. The reason I keep mentioning it is simple: Every week I talk to contractors who haven’t a clue as to what their costs are. Our conversations often start like this: “Can you print me a price book based upon the prices in my area?”
Let me be very clear: It is almost 100-percent certain that the “going rate” in your area is not enough to cover your cost of flourishing, or even surviving, in this economy. If you choose to ignore this fact, then you can just stop reading now. If you are convinced that you have to price your services at the bottom of the “area price” just to stay busy, then I can’t help you, so don’t even call me.
If you think that being busy implies you have a good business, then remember: You can stay busy by simply balancing a stick on your nose and you’ll lose much less money in the process. Obviously, the market will put some limit on your pricing, but working for less than cost is self-destructive. This makes it important to know how low you can go and still earn a profit. The lower your price, the less wiggle room you have for squeezing a profit out of the transaction - so price wisely.
Reducing Costs
In good times, overhead bloats. Period. It’s a law of human nature. In tough times, overhead must be reduced. Start the process by setting a very high hurdle before spending your resources on anything, anything at all. Here’s the hurdle: For every proposed expense, large or small, ask yourself, “How quickly will this expense produce a profit?”You can find different ways to phrase the question but keep this in mind: Your customer has to perceive value commensurate to the price of the services you offer. In many markets, your customers are cutting expenses also, so their value hurdle will be higher than before. If your selling price is bloated with unnecessary overhead, you will make it tougher to get over that hurdle. Ultimately, every overhead item has to help you get the sale before it can earn a profit, so set the hurdle high. By the way, have you ever seen a 300-pound Olympic hurdler? I didn’t think so.
Where Not To Cut Costs
When times are tough, you need to conserve cash wherever possible, but that doesn’t mean you should cut your expenses in every area. In fact, some expenditures will need to be increased. For example, unless you have a viable plan for growing your business without making the phone ring, don’t cut the advertising budget. You do need to look closely at what works and what doesn’t. Perhaps more direct mail and phone calls to existing clients are what you need. The cost per job booked on this type of advertising is usually much better than the cost of mass marketing.Even though it sounds like a vanity expenditure, if your trucks aren’t distinctive and well-maintained, you should consider a face-lift. A handsome, memorable vehicle gives customers a reason to call. A shabby vehicle gives customers a reason not to call. Beyond the “rolling billboard” function of a good truck identity, your memorable truck enhances the other marketing efforts you use. If you spend thousands on a direct mail campaign but your trucks cause customers to second guess a decision to call you, then you have just flushed good money down the drain.
In a good economy, flushing money down the drain results in poor profits. In a challenging economy, fiscal flushing can put your whole company under water. Do the necessary body work on your trucks, get a fresh coat of paint and apply distinctive decals with your company name, logo and phone number.
Often when times get tight, one of the first management reactions is to cut bonuses. You may have heard, or even rehearsed, the “times are tight so no bonuses this year” speech. If you need to cut bonuses because business is slow, that’s probably a sign that your bonuses aren’t linked to the performance of your individual producers. Here’s another sign that your bonuses aren’t linked to performance: If you have to decide how much bonus to put in the envelope at the end of the year (or other period), then your bonus does not make business sense.
If you run your business by the numbers, then you will know how much production you need to see in order to break even. If you pay bonuses based upon those production goals, then deciding how much to pay is already calculated in the system. The best part of production bonuses is that they kick in once your operating requirements have been met - which means that any bonus money you pay out is coming from bonus money the employee has earned for the company. It’s all up to the numbers. And if you want those numbers to increase, consider increasing the production bonus a little.
Survival Of The Fittest
As we discussed in my last column, hard times tend to weed out the weaker players. This is simply a truth; it is economic reality at work. You may be forced to make some hard decisions such as laying off employees or selling your favorite backhoe. Think hard about the decision but be realistic.In the event of a layoff, there’s never a pleasant time to do it but the sooner you do it, the better for all. Laid-off employees need to find work quick. If you lay them off as soon as you see the need, you may be able to pay them a stipend for a few weeks to give them time to find a new job. If you wait until the bitter end, that usually means you won’t have the wherewithal for generosity, so they get a cold, hard boot in the keister.
But there’s another casualty of economic reality. Some of your business associates will be going belly up. If they (or you) weren’t earning a profit in the good times, it’s almost certain that in tough times there will be no respite. We all have a right to try our hand in business, but there’s a big difference between that right and a guarantee of success.
When a company fails, its list of customers will still need service. If you can find a company that is struggling, you may have an opportunity to do it, its customers and yourself a favor by negotiating for its customer list. Use that list to stir up more work for your crew.
Pay the owner a percentage of sales and make those customers glad you found them. Let gross sales generated by the list set the selling price: Simply pay a fixed percentage of sales to customers on that list. Most likely, you’ll be paying less for these customers’ names than you would pay for advertising. At the same time, the seller of the list will be making more money off the list than he or she did running the business. Everybody wins in what could have been a total loss.
To flourish in this economy, scrutinize your costs more than ever before. You will have to make some hard decisions, but don’t strangle your business by cutting back on the advertising and sales budgets. No calls, no opportunities. No opportunities, no sales. When you do get an opportunity, offer plenty of options. The result will be better sales, better service and better profits.
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