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.
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