10 Steps to Prepare for a Down Economy
Recessions, or periods of reduced cash flow, are not singular monolithic events that affect all industries and all parts of the country equally. Neither are they predictable nor preventable. If they were, we could schedule them and we could prevent them. Keep in mind that some contractors will thrive in a bad economy while others will self-destruct in a good one. Landscape contractors are extremely creative individuals. Some can figure out a way to go broke even in a great economy.
I tracked approximately 50 companies through the recession of 1990. Each month or quarter, these companies would send me their financials and I would review them. We would compare the financials against company budgets established in late 1989. We developed what I call objective reference points. However, we had to deal with the emotional side of a very negative and challenging situation. Here are some pointers that we learned from this experience.
1. Establish a continuous recession-proof mindset.
The things that you should do to prepare for an economic downturn are the same things that you should do to make your company as profitable and efficient as possible during the good times. Because you can neither predict nor schedule a recession, you should always be preparing for one. The first thing that you must do is to prepare mentally for an eventual downturn. Next, you should diversify your business products and services. The first thing to go in a recession is installation work. Service work is much more resilient.
2. Establish an annual budget.
Each division should have a budget for sales and cost of goods sold (COGS). This budget is your most important tool. It helps you focus on the big picture. Sales should be monitored and tracked on a daily basis. The Bid Board or a similar spreadsheet tool can help you track sales. Every lead that is bid is entered in the Bid Board. It totals jobs that are won, lost or awaiting award. It constantly compares your sales budget to work won. This lets you know how you are doing throughout the year. You should display this sales to budget comparison information on a chalkboard where it is visible for key staff to see. If it is out of sight, it will be out of mind. Keep it big and visible for maximum motivation. More on budgeting.
3. Bid jobs accurately.
You focus on the little picture (individual jobs) by bidding jobs accurately. Your estimating system must be comprehensive as well as accurate. All costs (materials, labor, burden, equipment, office overhead, etc.) should be identified in the estimating process.
4. Monitor GPM (gross profit margin).
GPM is a contractor’s best friend. It is also the best indicator as to what is happening in your market economically. You calculate GPM by adding the office overhead in a bid to the net profit margin in the bid. During normal economic conditions, commercial installation projects usually have a GPM of 20 to 30 percent. Negotiated work usually has a 25 to 30 percent GPM, while competitive bid work has a GPM in the lower to mid-20-percent range. Residential installation projects usually have a GPM range of 30 to 40 percent. Maintenance jobs, both commercial and residential, normally have a GPM ranging from 30 to 40 percent.
Once a recession hits, you will see normal GPM ranges drop at least 10 percent overnight. Contractors seem to have a “knee-jerk” reaction to bad times. Without hesitation, contractors price their work at their break-even point in a recession and barely cover all of their costs. From 1990 to 1993, the contractor in Maine knew that if he bid a commercial installation job with more than an 18 percent GPM, he would not get the job. The GPM on commercial installation work is now running at 25 to 26 percent but it took 4 to 5 years for the GPM to get back to where it was in the late 1980s. Similar, though less drastic, trends were seen in the maintenance market. You should understand how to calculate GPM on your jobs and you should track it religiously.
5. Maximize revenue.
Treat every lead like it was your last. Focus on repeat business as well as new business. Log and track your leads in a contact management database like Act or Goldmine. Train your staff to not only think outside of the box when it comes to new business but to also groom your existing client database. Survey customers, send them notes and talk to them about their needs.
6. Maximize labor productivity.
Set production goals for everybody. Train your field staff to think in terms of these goals. Ensure each crew knows exactly what is expected of them every day. Provide each crew with feedback at the end of the day. Use an incentive system or tracking board to provide this daily feedback. Maintenance crews should know that if they complete their daily route by a certain time, that they were successful. Construction crews should leave the yard knowing what they need to get done that day.
7. Maximize equipment productivity.
I have seen clients improve construction productivity by over 30 percent by adding a single piece of equipment to their crews. Maintenance crews can see similar productivity increases by ensuring that the right mower is being used on the job. Hydrostatic walk-behind mowers can usually cut 20 percent more turf per day than a belt driven walk behind. A two-person crew billing $500 per day using belt-driven walk-behind mowers can usually increase revenue to about $600 per day by switching to more effective mowers. The labor hours are the same. The only increase in cost is an additional $20 to 25 per day in additional equipment costs. The rest is net income.
One client reduced his annual average hours per irrigation technician by over 100 hours. He got the same amount of work accomplished with 100 fewer hours by putting a GPS tracking system in each of his 13 irrigation vans. Study your equipment and new technologies. Make it work for you.
8. Minimize costs.
Office staff should have budgets for office salaries, equipment, supplies, postage, etc. Share a percent of the savings if they come in under budget at the end of the year. Field staff should have similar budgets for equipment repairs, fuel, shop supplies, etc. They can also be rewarded for coming in under budget.
9. Think like a leader.
Peter Drucker says it best in his book, The Effective Executive. Managers make sure things get done right. Leaders make sure the right things get done. One thinks tactically while the other thinks strategically. Leaders see the big picture but ensure the details get done. You need to think the same way and delegate the details as much as is possible. You need to concentrate on maximizing revenue, maximizing productivity and minimizing costs.
10. Network like crazy.
During the 1980s clients worked their businesses and they grew. In the early 1990s they did the same things but their businesses did not grow. In most cases they saw their sales decrease. The emotional toll on these contractors was enormous. It was like they were sinking in water and not knowing when they were going to hit bottom.
To counter this, the brainstorming meeting was born. Fifteen to 20 contractors, who were not competitors, and their staff, would jam into a hotel for 2 to 3 days. Everything under the sun was discussed. Contractors would make new friends whom they could call and with whom they could discuss issues. Because they were not competitors, they could talk openly. This provided an emotional outlet for these entrepreneurs. The brainstorming meeting was a support group of sorts where business ideas and management issues were discussed in a non-threatening atmosphere. It provided the emotional glue that banded these contractors together.
Plan on it
You need two basic things to prepare for and get you through a recession. You first need objective reference points to tell you how you are doing. Your annual budget, the Bid Board and individual bids are the three main items in this category. The second thing you need is a support group. You need a group of like-minded people who can encourage you and help you implement good business practices. Because you cannot predict or schedule a recession, you have to always be preparing for one. You must be “ever vigilant.” You cannot let your guard down.
This article was adapted from James Huston’s
book, Preparing for and Responding to a Down Economy. The
author is president of Smith Huston, Inc., which specializes in construction and
services management consulting to the Green Industry. Mr. Huston is a member of
the American Society of Professional Estimators and he is one of only two
Certified Professional Landscape Estimators in the world. For further
information on the products and services offered by Smith Huston, call
1-800-451-5588, e-mail SHI at email@example.com or visit the Smith Huston web
page at http://www.smith-huston.com.