By Tom Grandy, Founder
Last month we talked about how many trades companies are in the process of going out of business…and don’t even know it. Typically, the process takes 1-4 years during which there are usually three distinct steps or stages. Step 1 and Step 2 were discussed last month. If you missed last month’s article, click Part 1 and review it prior to moving forward. This month we are going to discuss Step 3, which is often the final step prior to closing the doors.
The company is now four or five years old. Gross sales have continued to climb. Most of the low-profit, new-home construction work has been phased out, with residential and commercial sales climbing. The company has gained an outstanding reputation in town for doing quality work, and support staff and a couple additional techs have been added to the payroll. The trucks are looking a bit ragged but as soon as the company makes a little more money, it will be able to afford the additional loan payments to at least replace the service trucks. The owner has really missed having dinner with the family, but things will smooth out soon. Before long, the owner hopes to be able to attend one of Billy’s ball games and/or take the family on a real vacation!
However, the current reality is that cash flow is really tight. The company has been placed on COD (again) and redepositing the money it borrowed from the family savings account — well, it just hasn’t happened yet. The owner’s wife is also getting nervous. She has been working in the office the past couple of years and she keeps pestering her husband about her inability to pay the bills at home, as well as the office.
Sales are up but pressures are building. Cash flow is as tight as it has ever been and profits seem to be on a downward spiral. The owner’s thinking is similar to the past several years: “If we can just hold on a bit longer, just a little bit longer, I know we will get over the hump and everything will be lovely on the other side.”
Solution to Step 3
The company appears to be doing well. It has moved into a new building and several more techs have been added to the payroll. New trucks (purchased through a variety of loans from different banks) have replaced many of the old ones and the company’s reputation in town is building. The company just needs more cash to buy time so the current bump in the road can be conquered and then everything will be wonderful on the other side.
At this point, the line of credit has been maxed out, and using the suppliers as the company’s bank has ceased now that the final supplier in the area has placed the company on COD. All unnecessary extra inventory has been sold, as well as some of the older equipment and vehicles, just to generate a bit more cash. The reality however, is that it’s still not enough to get the company through the current cash crunch. Then, the lightbulb goes off. The house! That’s it. The owner will secure that second or third mortgage on the house. That will generate the needed cash to get over the hump and on to the greener pastures that have been dreamed of for the past several years. It will be a tough sell to the owner’s wife but she will understand, if she doesn’t divorce the owner first.
With negotiations completed, the second mortgage on the house is secured. The cash goes back into the company and everything really is lovely…for a while. Then 6, 12 or perhaps 18 months later, the company owner finds himself or herself right back in the same position he/she was in during Steps 1 and 2. However, this time there is one very subtle difference. The need for cash is there as in the past but at this point there is no place to get it from. The banks, suppliers, friends, and family have all been tapped out.
Then the light bulb, glowing like the noonday sun comes on, allowing the real question to be honestly asked: “What is the real root problem that has not been addressed in the past?”
Two things that put most companies out of business
Typically, there are two things that put most trades companies out of business. The Number One cause of business failure within the trades industry is improper labor pricing. Translated, most company owners are unaware of what they really need to be charging per hour in order to cover their real costs of doing business (from a cash flow perspective) while generating a reasonable profit. As mentioned earlier, most new companies set their initial rates slightly below what the rest of the local owners are charging with little regard for what their new start-up company really needs to be charging to make a reasonable profit. As cash flow gets tighter and tighter the tendency is to bump their rates a bit, with fear and trembling again, with little regard as to what the rates really need to be to generate the profit they desire.
The Second cause within the industry is cash flow. A company can be priced absolutely perfectly and still go out of business because of cash flow issues. It takes a lot of cash to run a business. It takes cash to fund inventory and receivables. It takes cash to cover the general overhead of the business, and of course, it takes cash to make payroll each week. Lastly, it takes significant amounts of cash to fund the growth of the company. Most trades companies start out with little to no cash and are therefore at a serious disadvantage right from the very beginning.
According to the United States government, 25% of all start-up companies fail the first year, 35% by the second year, 60% by the fifth year, and a whopping 70% by the 10th year! However, after having spent most of my life working with contractors within the trades industry, I suspect the failure rate within the trades industry is a lot higher than those general numbers provided by the Bureau of Labor Statistics.
If any of the points discussed in this two-part article sound familiar, take them as a wakeup call! Since most companies fail because of improper labor rate pricing, it might be time to take a day off to review the company’s labor rates from a cash flow standpoint.
Have you ever been part of the process of closing out a friend’s or family members estate? It’s a tough process and I have been through it three times. There are dozens of details that the average person never thinks to ask or record until it’s too late. Things like: Do they have a will and where is it? What investments do they have and where are they located? Does the person have a safe deposit box and if so, which bank and where is the key? How about a list of loans and/or automatic payments from a checking account? Dozens and dozens of these kinds of questions are all found in the What’s Where When You’re Gone? manual. This month the manual (which also includes a PDF version if you prefer to enter data that way) is only $24.00 this month. Order today!