One of the most misunderstood words in the trades industry today is the word "growth."
The problem lies in the fact that most contractors see a direct relationship between growth and profitability. If we do more work, we made more money, right? Well maybe. There are three very specific points of growth that can put a company out of business.
The first stage of growth that affects every company is when the owner moves from the field into the office. In other words, the owner stops working in the business and starts working on the business.
It is an essential stage of growth but is necessary for a company to increase in sales.
This first stage of growth is a “two-headed monster” since it creates both a labor pricing problem and a cash flow problem.
Let’s assume you are the owner and you have been working in the field with one other tech.
Again, assume you are paying yourself $30,000 in annual salary.
One day the light bulb goes off and you realize if the company is going to get much bigger you are going to have to get out of the field and begin to run the company like a real business. It’s a good theory and it’s the right thing to do.
The problem, however, is the salary you were paying yourself while working in the field just changed from being productive labor to an overhead cost.
Normally, the movement of the owner from the field to the office creates a need for labor pricing to increase from $7 to $12 per hour just to make the same profit.
Few companies make that kind of change in their hourly rate, so the result is lower profits and significant cash flow problems. Careful planning at this stage of growth is a must.
Now, let’s assume your company successfully made it through the above transition.
The next critical stage of growth occurs around the $750,000 to $1,200,000 mark in gross sales.
This is the point where the company must make some major investments to reach the next level of growth. When the company approaches the one million in gross sales guess what?
QuickBooks is no longer sufficient. Now it’s time to at least consider purchasing that integrated computer system.
The new system will cost the company from $5,000 to $50,000 plus training, and, normally, at least one additional person to take care of the daily data entry.
Another strange thing happens around the million-dollar level.
You, the owner, begin to realize you simply can’t do it all.
You can’t run the crews, do all the estimates, make the sales presentations, order the materials and give the company the overall direction it requires.
To get to the next level of growth will require hiring additional people, investing more in equipment and inventory while the general business overhead continues to increase. The bottom line at this stage of growth is quite simple: To reach the next level of growth, the company must make significant investments BEFORE they have the sales to support it.
The result is severe cash flow problems. Again, it is critical that careful planning in the form of a monthly cash flow budget with cash flow projections take place.
At this point, the company doesn’t need an ounce of prevention or even a pound of cure. What it needs is a ton of careful planning and adjusted hourly rates to maintain profitability.
The third life-threatening stage of growth in a company can occur during the first, second or 55th year. Not only can it appear at any time, but it can appear multiple times in a company’s life.
What I am talking about here is rapid growth, which is defined as any growth above about 15% a year.
Rapid growth requires more cash for inventory, receivables and increasing overhead costs not to mention the need for additional tools and equipment.
Rapid growth also puts a real strain on cash flow.
Believe it or not, most companies that go out of business do so in their highest volume and most profitable year. Cash flow kills them. Growing much more than 15% a year will cause severe cash flow problems in your company.
That does not mean a company can’t grow more than 15% a year, but if it is growing at 15% or more, it is time to do some serious cash flow planning in the form of a budget with monthly cash flow projections.
If you find yourself moving from the field to the office, reaching the $750,000 to $1,200,000 in gross sales or experiencing growth above 15% a year, it is time to stop and take a good look at what is happening. Any, and all, of the above stages of growth, will put a real strain on a company’s cash flow.
If you are in one of these stages, it’s time for you to call a time-out.
Take time to create a month-by-month, department-by-department, cash flow budget for your company.
Creating a budget for the coming twelve months will help the company project profitability and cash flow needs every month.
The real value of projecting monthly cash flow needs through budgeting is that it will “buy” you some time to prepare for the coming cash crunch.
The budget will not prevent the cash crunch from coming, but it will, hopefully, give you enough lead-time to plan on how you will get through it.