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.
