What Do You REALLY Need To Know To Run a Profitable Business?
Everywhere I go I'm asked the same question: "What do I really need to know to run a profitable business?" The answer to that question will be covered in this three part series. I'm sure you all have heard the story about the guy who bought what was supposed to be an unusually smart mule. After purchasing the mule, however, he was unable to get it to perform any of the tasks the previous owner had told him it was capable of. The previous owner was called and soon showed up at the new owner's farm. The current owner explained his dilemma to original owner. The original owner, to the current owner's horror, walked to his truck, took out a 6-foot long 2x4, and smacked the mule in the head with all the force he could muster. The mule then calmly proceeded to do everything the original owner had said he would do. The current owner was aghast. "Why did you hit the mule with the 2x4?" he asked. The original owner than said "You have to get his attention before he'll do anything,!"
Part 1 of this series is designed to get your attention. In Parts 2 and 3 we'll discuss the specifics of what needs to happen within your company to make it truly profitable.
Over the past 17 plus years I have traveled hundreds of thousands of miles and have trained over 14,000 contractors how to run successful companies. Guess what I found out? The 80/20 rule really does apply-20 percent of the contractors are making 80 percent of the profit in the industry. I also found out that, of those 20 percent highly profitable companies, nearly all the owners fully understood the basic business principles of running a company. As a matter of fact, some of the most profitable company owners knew very little about the technical end of the business but what the did understand was how to run a profitable company.
As we get started, I'm going to share a story many of you have heard before. I share it at every labor pricing seminar and/or boot camp I present. The reason I share it is so that everyone will realize they're NOT unique. Every contractor, in every trade, faces the same problems and fears and most have a very common history. See if this sounds familiar:
More than 90 percent of the current owners in our industry used to be a tech working for someone else. One day you're out in the field working when this little light bulb goes off and this seemingly unique thought enters your mind. "Ya know what, the companies paying me $18 an hour and they're charging the customer $75.00 an hour. If I went into business for myself I could charge those high rates and I'd be rich."
The thought rolls around in the future company owner's mind for a few weeks, months or
perhaps years. Then one day it happens, you make the break and you start your own company. Most start out by themselves, or perhaps with one other person, usually based out of their house, garage or a very small facility somewhere. It's not to long into the process before the first major
decision has to be made. "How much do I charge?" Now this isn't as big a problem as you might think. Most new company owners simply call all over town and find out what everyone else is charging and that's what they charge, or perhaps a little bit less and bingo-you're in business!
The irony is that things generally go along pretty well the first 3-5 years. You're making a little more money than you did at the last job, even though you're probably working twice as many hours. Things aren't as great as you thought they would be but you still have a clear vision of building this thing into a real money machine over the coming years, it will simply take a little longer than you expected.
Now lets digress a bit and look for the future seeds of failure by examining those first 3-5 years a bit more closely. You're making money, the question is why? The answer is pretty simple when you think about it for a few minutes. You're working out of your house or garage and you have very little overhead. Sure you have some gas, maintenance, and insurance cost but your costs of doing business pale in comparison to the other large plumbing companies in town that have lots of employees, bunches of vehicles, huge benefit packages and lots of overhead to cover. The irony is that you, and the large companies in town, are both charging the customer about the same thing. Net result-your profit margin is pretty good and theirs is pretty slim.
Your company continues to grow, adding techs and generating more work. Things "seem" pretty good until you reach that 6-, 7-, 8- or perhaps the 9-year mark. At this point you notice a strange phenomenon taking place. You find yourself doing more and more work while making less and less money. Sales were up 20 percent last year and you made less money than you did the year before and you find yourself scratching your head asking yourself "What's going on?" In a nutshell the company's overhead is going up faster than its pricing. Does the average contractor understand what's going on? The answer is a resounding no.
The reason most don't understand what's happening is that the process of going out of business is a very slow one, often taking between one and four years before most contractors even realize they have a serious problem. Over that period of going out of business there are usually three distinct stages, or situations, that take place. Let's review the stages, just in case you, or perhaps a contractor friend of yours, might be in one of them.
Stage OneThe first problem, or red flag, is this. Cash flow is tight and profitability has seemingly vanished. What's the solution for the average contractor? That's right, they simply do more work. Rather than working 8 hours a day they start working 10 or 12 hours a day. Rather than working 5 days a week they start working six or perhaps even seven days a week. The result, cash flow increases and everything seems OK, at least for another six months or maybe 18 months, and then you find yourself right back in the same situation again. Now our contractor is ready for stage two of going out of business.
Stage TwoDuring stage two, cash flow again becomes tight and profit disappears. The company, however, is growing. Sales are up, you've added techs and your reputation in town is getting stronger. You think to yourself, "If I could just hold on a little while longer I know everything would be great. Again, with the pressure on, the solution becomes clear. "We need more money, more cash flow." Remember those first years you were in business? During those initial years you were making money and you were smart enough to put some of it aside in a savings account. Now it's time to use that rainy day savings. So the owner puts his savings back into the company and again, everything seems OK. The pressure is off. You can pay your bills and the company continues to grow. All is well for another six- or even 18 months. Now the company enters stage three, which is often the final stage prior to going out of business.
Stage ThreeThis stage is a bit confusing. The company is seemingly doing really well. Sales are up, you're doing quality work, you have great techs and the customers love you. The only problem is that you aren't making any money. But again your mind plays tricks on you. You think to yourself
"Gee, we have everything going for us, and we're growing. If I could simply hold on just a little while longer I know everything would be fine."
With this in mind the curtains open for Stage Three to begin. To hold on a little longer means you'll need more cash so off you go to the bank to get that second- or third mortgage on the house. You also extend your line of credit as far as you can, sell any unnecessary inventory and get rid of any old equipment you don't absolutely have to have. Oh, by the way, did I mention you are also using your distributors as bankers and that you are currently on COD? At this point, however, you have successfully generated some extra cash which will buy you a little more time and soon you'll be over the hump and everything will be alright. Right? Wrong! Yes, the extra cash flow does buy us some more time but it doesn't solve the problem.
Do I have your attention yet? Do any of the things I just discussed sound familiar? It does to most contractors I talk to. As a matter of fact, by the time I finish this discussion at most of my programs it's time for a break and, without fail, at least a couple of contractors in the room will come up to me and say, "Gee, Tom, you just described our company to a tee. Did someone tell you about us before we came to the program?"
No, no one told me about his or her company but the reality is the process I just described is familiar to all to many contractors in every trade across the country. So now we come to the subject of this series.
What do contractors really need to know in order to run profitable companies? Every successful company I know fully understands the following items. Number one, they fully understand how much they need to charge per hour, in each department, to cover their real costs of doing business while generating a reasonable profit. Next, nearly every profitable company has made the transition to flat rate pricing in their service department. Thirdly, they've created month-by-month, department-by-department cash flow budgets to determine if one department is subsidizing another and they use that budget to track their progress each month to be sure they're on target. Next, the successful company owner also has a vibrant and growing service agreement program. Lastly, profitable companies have a well-developed, continuous, marketing program.
Parts 2 and 3 of this series will discuss each of the above areas In the meantime you may want to consider attending one of our of three day "Basic Business Boot Camps." Over the three days we will cover all of the above items, in detail. Grandy & Associates presents boot camps across the country but if you want to mix business with a little vacation time you might want to consider attending our Las Vegas boot camp Apr. 11-13. Check out our redesigned Web site (www.GrandyAssociates.com) for all the details, or you can call our office at 1-800-432-7963.