Archives for October 2019

Three Points of Growth – Part 1 of 3

By Tom Grandy

The most misunderstood term within the trades industry is the word GROWTH.  Growth is generally considered a good thing.  Most company owners, especially new ones, visualize a direct relationship in their mind between growth and profitability.  If the company does more work it will make more money.  If they do a lot more work, they will make a lot more money and if they can double sales, they will double profits.  Although this can be the case, it’s usually isn’t.   There are actually three distinct periods of growth that literally have the potential to put the company out of business. 

Owner Moves From The Field To The Office

The first point of growth that has the potential of putting a company out of business is when the owner moves from the field into the office.  This transition typically takes place when the company has between 3-5 technicians in the field.  This point of growth affects the owner and the company in two very specific ways, one mentally, and the other financially. 

From a mental standpoint, it’s a really tough transition.  The new owner is transitioning from a technician mentality into a business owner mentality and therefore, needs to learn the business side of the business.  That is a really hard transition and usually one the owner never really thought about prior to starting the new business.  The new owner left the old company for freedom.  The new entrepreneur visualized working in the field, doing sales, and having the freedom to pretty much do what he or she wanted to do when they wanted to do it.  However, things have now evolved to the point where someone needs to actually run the company.  How does the new owner learn how to do that?  They didn’t learn it in high school and nothing was covered on the business side of the business during trade school.  As a matter of fact, an individual can actually receive a PHd in Business from Harvard University and still not know how to run a small business.  The degree may help the individual run a corporation but normally is of little value when it comes to running a small trades company.

So how does the new owner learn the business side of the business?  Generally, it’s by the road of hard knocks.  The owner does some things right and a few things wrong. If their learning curve is not flat, they learn a few things along the way and the company survives.  If not, we all know what happens.  There a few business seminars and webinars that teach the basic principles of running a profitable business but who has time to learn.  Things are busy.  Fires need to be put out and those pesky customers need to be taken care of.  Working 60-70 hours a week leaves little time to attend a class, even if it’s online.

The bottom line is that making the mental transition from working in the field to working in the office is tough.  It is a necessary transition but a really hard one.  It’s called “forced growth”.

At the same time the new owner is adjusting to the mental transition, there is also an economic shift taking place.  When the owner was working in the field, he was productive labor (and happy).  However, when the owner moves from the field into the office, their salary just became an overhead cost.  The additional overhead generally requires the company to increase their hourly rate to the customer between $8.00 and $12.00/hour, just to make the same profit they made before.  Ask yourself a question.  Of all your friends, neighbors or relatives that made the transition from the field into the office, what percentage actually raised their hourly rates $8.00 to $12.00/hour?  The answer is really close to zero.  So, what happens?  The company begins that one to three-year process of going out of business.

There you have it.  The first point of growth that has the potential of putting the new company out of business.  We will discuss the second period of growth that can put a company out of business.  Here is the link to Part 2 of 3 – Three Points of Growth.

Know the Root Problem Before the Repair is Performed

By Tom Grandy

How many times has the tech quickly diagnosed the repair and performed the work only to find out the problem was not fixed?  It happens a lot and it tends to create some very unhappy customers.

Just this past month I was in my father-in-law’s home that had been shut down for over two years.  He had moved to an assisted living facility.  When we opened the house the list of needed repairs was quite long.  The plumber had to replace two toilets, fix a water leak and install a new sink facet.  When the work was completed, he left.  The next day we noticed the water pressure was very low in the faucet he replaced.  Nearly two weeks went by before we could get hold of him to return and fix the problem.

Note to self:  Be sure repairs are done properly and systems tested, prior to allowing the tech to leave the home.

When he returned to work on the facet, we noticed there was water under the hot water heater, or so we thought.  Yes, it was an older piece of equipment so his immediate suggestion was to replace it. Well, that sounds really simple but the house ran on propane so a propane tank had to be located.  That alone was not an easy task and eventually required one be purchased from a distributor 45 minutes away. 

When the water heater arrived he installed it.  After the work was completed, we noticed there was still water around the tank.  Come to find out there was a leaking pipe in the wall right behind the water heater.  He removed the drywall and made the repair.  Once completed he mumbled, “We may have just replaced a working hot water heater!”  We were not happy customers.

The point of both situations is obvious.  Slow down and do the repair correctly the first time.  Test the repair (faucet in our case) before leaving.  Also, before recommending replacement of a piece of equipment, be sure you know the root cause.  Failure to do either of these things can cause the company to lose a customer.  This particular tech will not be returning to my father-in-law’s home.

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Three Points of Growth (Part 2 of 3)

By Tom Grandy

Last month we talked about the first point of growth that has the potential of putting a company out of business, which was when the owner moves from the field into the office.  This month we are going to take a close look at the second point of growth that can put a company out of business which is when gross sales reach roughly a $1,000,000 per year.

The most difficult growth period for any small business is when gross sales are between $750,000 and $1,200,000 or roughly a million dollars a year.  By far, this is the roughest and toughest point of growth the company will ever experience.  When sales are nearing a million dollars a year lots of things are happening and they are all happening at the same time.  So, let’s begin with the owner.

The owner has generally been in the office, running the company, for several years as sales near a $1 million.  The comfort level of learning the business side of the business is getting better each day.  However, as the company nears a million in gross sales, something else is happening to the owner.  His hours are maxed out!  At this point, working 60-70 hours a week simply isn’t enough.  Help is needed.  Now that extra person may take the form of an office manager, field supervisor, or perhaps a salesperson.  The bottom line is clear.  If the company is going to get any larger, the owner needs help.  That extra person or persons, although totally needed, is going to dramatically increase the company’s overhead costs.

Something else is beginning to happen. QuickBooks alone isn’t working as well as it used to.  Increased sales have created the need for more information.  Let’s begin with customer history. 

QuickBooks provided a list of customers, which had been sufficient up to this point.  The owner knew most of the customers personally since he, or she, sold them the job and in many cases actually performed the installation or repair.  The owner “remembered” where the customer lived, what equipment they had and important facts concerning their lifestyle and pets.  However, as the company grows and approaches that critical million dollars in gross sales, there is a problem developing. The owner no longer knows all the customers personally.  The real need to record total customer history has now come front and center.  The company needs a customer base program that will record all the customers information so it’s available to the entire staff.  As the company grows it becomes necessary to record things like; brand and serial numbers of equipment, whether the customer has a maintenance agreement or not, what specific repairs have been performed, and when, and did they pay their bill on time.  These are just a few things that need to be kept track of and there are a lot more. The company now needs a full-blown customer base program and QuickBooks alone does not have it.

What began as a simple company that performed installation and service to a limited type of customer has now dramatically changed.  Now, the company is doing a variety of things. They are doing residential, commercial, and perhaps industrial work.  Each of these areas has installation and service.  The company has begun a maintenance agreement program and depending on the trade, may even have a retail store.  One of the potential dangers of growth is that one department can easily be subsidizing another and no one knows it, until it’s too late.  As the company nears that mystical million dollars a year the need to departmentalize the company’s P/L statement is becoming clear.  This can be done with class codes within QuickBooks but it’s not an easy process.  To accurately separate departments will likely require a more sophisticated accounting program.  Did I mention that will cost a bit more money?

When the company was small, inventory wasn’t a big deal.  The owner knew what was on hand and if he wasn’t sure, a short walk to the back of the building with a glance around the shop would quickly provide the needed information.  Now, however, the company has grown.  Now the need for a computerized inventory system is glaring.  What’s in stock?  What is the reorder point? Who is the preferred supplier?  With several service techs and a couple installation crews, parts and equipment are going out the door faster than the owner can count.  QuickBooks can’t provide that kind of information.  The company now needs a detailed inventory program.

Dispatching service in the early days was simple too.  Initially, it was just William and then Chad joined the company.  When the service call came in, the first available tech was quickly dispatched no matter the location.  But now things have changed.  Now the company has several service techs, some residential, and some commercial.  To be efficient, the company now needs a dispatching program.  QuickBooks doesn’t have that either.

So, what’s the point?  When a company is nearing a million dollars in gross sales, with a desire to far exceed that number, it’s time to at least begin thinking about installing that brand new fully integrated computer system, or at least to checkout additional programs that work in conjunction with QuickBooks.  Now the company is looking at an investment of $5,000 to $50,000 dollars plus at least a part-time person, if not a full-time person, to run it!

As sales move towards a million dollars a year, receivables are also becoming a major problem.  Panic would strike in the early days when a couple customers had not paid on time and receivables climbed to $25,000 or $30,000 dollars.  How was the company going to meet payroll that week?  The good news was that the company was growing which meant more money coming in, so cash flow wouldn’t be a problem before long, right?  Wrong!  As sales go up, so do receivables.  Now the company is easily looking at receivables in the $100,000 range or more, especially if they do a lot of new construction and/or commercial work.

When sales approach a million dollars a year, the company is being forced to make significant investments in staff and software, not to mention the need for additional cash to fund increased inventory and receivables.  That is a lot of additional investment but it’s totally needed in order to prepare the company to move to the next level.  Unfortunately, the company often does not yet have the sales to support the needed investment. The results are predictable.  As sales go up, profits are going down.  I don’t have any national statistics to support what I am about to say, but I have observed contractors, in every trade, across this country and in Canada, since 1987.  What I’ve observed is that a huge portion of contractors that reach $1,000,000 in gross sales for the first-time–lost money!  Wow, talk about frustration.  The new owner has spent years trying to reach a million dollars in gross sales.  Now they have finally reached that gross sales goal…and they are losing money.  Ouch!

Producing a million dollars in sales really is the most critical point of growth in the life of any contractor.  Now some reading this have already surpassed this number.  Congratulations, but watch out because the same process reoccurs at the $2.5f million, $5 million and $10 million-dollar levels.  These are all points of growth that will require the company to make significant investments to prepare for the next level but often without the corresponding sales to support the needed investment.

There you have it.  The second point of growth that has the potential of putting the company out of business. Next month we will look at the third and final stage of growth that can bring a company to its knees.

Guess what, you don’t have to re-invent the wheel when it comes to learning the business side of the business.  The Profit University Audio Series covers every conceivable business topic from selling the business to where to find techs.  The program contains over 275 audio presentations with a new one being posted each month.  Now for the good news.  The investment is normally $24.95/month but with this month’s Website Special the investment is only $19.95/month and it stays at that rate as long as you are a monthly subscriber.  Don’t miss this unique opportunity.  Sign up today.

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Service Managers - Learning Path

Carlyle Compressor Teardown Full Course - Self Paced Online Training

Planning for Profit Workshop

Cashflow and Cashflow Budgeting

Service Managers - Learning Path

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