By Tom Grandy, Founder of Grandy & Associates
If companies failed quickly and all for the same basic reason, most owners would soon learn to avoid the traps and move on to profitable growth. However, it doesn’t work like that, at least not within the trades industry. It’s often a slow death.
To illustrate the point, let’s review the often-told story of our friendly local frog named Bill. One day Bill gets caught by some neighborhood children and they drop Bill into a pot of boiling water to see what happens. Bill was the head of his class at frog school and immediately realized something had dramatically changed and not for the better. This was not the pond in which he was used to swimming. Being a smart frog with exceptional intelligence, our friendly local frog almost immediately realized the water was not good for swimming and instantly jumped out of the pot. Disaster was avoided and life as a local frog continued uninterrupted.
Now the scene changes to focus on Robert. Robert is a local frog too, but not as smart as Bill. Let’s just say he is closer to the bottom of the class than the top. The local kids remembered how Bill reacted when dropped into the pot of boiling water so they decided to try a different approach to see how another frog would react. It didn’t take long for Robert to get caught. Before he knew it, he found himself in a big pot of cool water. Life was good. He swam back and forth enjoying the cool and refreshing water.
The neighborhood kids now turn up the heat, just a little. Robert doesn’t even notice. There aren’t any other frogs around but hey, that’s great. It seems he has found the only uninhabited pond in the area. A couple hours later, the kids turn up the heat a bit more. Robert is beginning to realize the water is a bit warmer than before but it’s no big deal. It’s midday and the sun has been out all day long so the water should be a bit warmer, right?
The kids continue turning up the heat ever so gradually throughout the day. To the children’s surprise, Robert makes no effort to jump out of the pot even though he could easily do that at any point. The temperature is turned up a couple more times and soon it’s time for dinner, so everyone heads home for the night. At this point, Robert is sweating a bit but still relatively happy to have this small pond all to himself. He is getting a bit uncomfortable but then who isn’t every once in a while? The next morning, the neighborhood kids agree to meet at 7 a.m. to see how their friendly frog is doing. To their surprise, Robert was floating upside down, dead as a doornail. Robert had croaked!
How could that have happened? The water was hot and Robert should have jumped out of the pot, but he didn’t. Why? It was because the changes in his environment were so gradual, he didn’t even notice…until it was too late!
The One- to Four-Year Process of Going Out of Business
Guess what? The process of going out of business within the trades industry is not all that different than our friend Robert’s situation. It generally takes one to four years for most trades companies to go out of business. The actual process goes largely unnoticed until it’s too late. However, there are typically three very distinct steps, or stages, that take place during the process.
Step 1
The company has been in business for perhaps 18 months. Things are going well. An additional tech or two is hired and the company is growing. Sales are up. Typically, the new entrepreneur is still working out of his or her home. However, there is this strange, unexpected, phenomenon beginning to take place. Sales are continuing to increase but profitability seems to be slipping. Even with the increased sales, cash flow seems to be more and more of an issue. Some weeks, even the company’s small payroll is hard to meet. It’s not all that unusual for the new company owner to miss a paycheck or two. Sure, profits are down and cash flow is tight, but the new owner is 100% confident it is just a natural phase of being in business. It will pass. In the meantime, however, something has to be done.
Solution to Step 1
The good news is that the solution is relatively simple. The company just needs to do more work! Instead of working 8 hours a day, 5 days a week, it begins working 10 hours a day, 6 days a week, and on occasion all 7 days. The bump in the road is averted. Cash flow has increased and with it the pressure of meeting payroll has subsided. The company can now pay its bills on time, consistently make payroll, and best of all, the owner is being paid — most of the time. All is good for another 6, 12 or perhaps even 18 months. Then…the company finds itself right back in the same situation it was in at the beginning of Step 1. Sales are up, profits are down, and cash flow is tight.
Step 2
The company is now two or three years old. It’s growing and gaining a pretty good reputation in the area. Things had gotten a bit tight working out of the house, so the company has moved to some rental space that seems to meet its current needs. Another tech or two has joined the team and sales are continuing to increase. Life is pretty good with a couple of minor exceptions.
Even though sales are up, profitability seems to be falling…again! When it comes to receivables, those lousy home builders are now taking 30–60 days to pay. Even some of the company’s residential customers aren’t paying their invoices on time. Just because it sometimes takes a week or two to get the invoice out is no reason they shouldn’t pay on time. The receivables problem is also causing a domino effect with the company’s suppliers. Suppliers are no longer getting paid on time, every month. Sometimes payments are 30, 60 or even 90 days late. As a matter of fact, last week the rep even mentioned those dreaded letters COD* during his visit. Gee, it’s not our fault. If we don’t get paid on time, how can they expect us to pay on time?
Some of the minor bumps in the road are getting rather serious. However, the company is continuing to grow, with sales up nearly 30% over last year. If the company can simply hang on, just a little bit longer, everyone is totally convinced it will get over the hump and everything will be lovely on the other side. The owner is working 60–70 hours a week but that can’t be all that unusual for young companies. Purchasing that boat and cabin at the lake may take a bit longer than originally anticipated but it will come. Since sales are increasing, significant profitability can’t be that far off. We just need to buy a bit more time so we can get over the current hump.
Solution to Step 2
Once again, the solution seems relatively simple. The first year or two, when the company was making money, the owner was smart enough to put some of that money aside in a savings account. The current “temporary” bump in the road can easily be solved with a bit of additional cash. The owner simply needs to take funds out of his family’s savings account and invest those dollars back into the company. The owner’s wife won’t be thrilled but she worries too much. Entrepreneurs take risks; it’s a natural part of the growth process, right? Anyway, it will be a temporary loan. With a little luck, the money will be returned to the savings account soon, plus some. The owner’s wife will then understand and be grateful for her husband’s wise business decision.
The savings account money is then invested back into the company, and everything seems fine, for another 6, 12 or perhaps an additional 18 months. The bills are paid, the threat of COD has pretty much vanished and everything “seems” ok. However, as the months pass, an all-too-familiar pattern seems to be repeating itself. Sales are continuing to climb, cash flow is getting tighter, and profits are falling.
Next month we will discuss the third, and often the final, stage of going out of business.
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