4 Steps to Prep Your Business for Contraction

In an industry like remodeling, it's vital to prepare for expansion or contraction in the market. If you have a long-term career in this field, you will be affected by both. Below are four measures we take at Medford Remodeling to address any future business environment, specifically business contraction.

Step 1: Dial in Processes

A vital step to preparation is documenting systems and processes. 

It allows for smooth operations during any time of change: moves in staffing, maternity leaves, or other unexpected events. A good written process should be valuable, teachable, repeatable and kept up to date.

We organize ours into an organization chart. Everyone wears multiple hats, so the organizational chart follows a color-coded system. In my case, my colors correspond with managing the design-build side of the company, my CEO title, director of operations, and HR. Each title links to a step-by-step process, and my written process, for example, is 35 pages long.

Documenting processes also shines a light on areas of inefficiency and helps increase gross and net profits.

Listen to Kourtney Davis talk planning for expansion and contraction:

Step 2: Use KPIs as Your Crystal Ball

We know when a downturn is coming by carefully watching our key performance indicators (KPIs).

These numbers give our leadership team the ability to forecast with much greater accuracy, which removes volatility out of the month-to-month and quarter-to-quarter. When you can predict future behaviors, you can control the tempo of the business.

We watch sales, revenue, gross profit, marketing, operating costs, and net profit. We track them in dollars and percentages on three-, six-, and 12-quarter averages. They work as trailing indicators, helping us to watch if history will repeat itself. We aim to adjust things before production starts.

Step 3: Communicate Conditions, Always

Whether the market is up or down, as a leader,you have to acknowledge what's going on, and direct your business towards what's happening, not what you wish would happen. 

We tell clients we’re X amount of months out. We tell our trades that if we have work, they have work. If not, they don’t. Leads, sales, and the economy are all weekly discussions for us in team meetings. We shift our team toward a mindset of urgency or patience. 

Yet we don’t sit there and share gloom and doom. We ask for creative ideas. The team should never be surprised if a difficult decision has to be made.

Step 4: Always Know Your Next Move

Leaders must be prepared to ride the waves of the remodeling industry. One vital thing our company founder, Mike Medford Sr., taught us is that when things are growing, you expand slowly. When things are slowing, you cut fast. 

As a way of preparing for a slowdown, we have six budgets for six different phases of revenue drops. These phases go down to the bare minimum to keep the overhead paid and all employees are contracted. Each budget for each phase contains a step-by-step outline of responses. This helps us react quickly and decisively to whatever happens in the market.

When you build a scale-down model that’s completely separate from your growth budget, you can dismantle any part of your company very quickly. It gives you the tools and directions to make those changes. And the best part about it is it takes all of the emotion out of it.

But you have to have the courage to act on it. That's very difficult. So many business owners can see the red flags as they're heading into a down market, but their emotions get in the way of making fast contractions to adjust to the market. And it can be detrimental to a business.

With a scale-down model, you don't drag the whole team down with you. In our example, a scale-down step could be cutting back from four people in a role to three, then two, then one. Our plans go down as far as the founder and his son in tool belts. 

Most business owners always have growth in mind, but every time you grow, you must also think about how to contract if needed. One way could be getting your leases in a month-to-month format. If you're on a lease month-to-month, it's a lot easier to dismantle should you have to.

Watching it Pay Off

We saw the current market conditions coming in the summer of 2022. The quality of leads, job sizes, and sales pace all went down. What it told us was that production would be slow at the beginning of the year if we didn’t react. Due to the difficult decisions we made last year, our bottom line this year is better than anticipated, which further emphasizes that our scale down plan worked as planned.

It's better to overreact than under react in a down market. Always have six months of overhead in cash. Keep those reserves, put an emphasis on the value of your processes, and carefully watch what’s going on in the market.