Two years ago, a home improvement company in the Southwest changed its name and took on a new product line, seen as the first of several to come. The owner of this company, now in its fourth generation of management, says that “we dabbled” in fiber cement siding in 2015, but went full bore into selling and installing the product in 2016.
The result? This year company’s sales passed $5 million for the first time ever, and 40 percent of those sales were siding jobs. The revenue enabled the company to make necessary capital investments—replacing worn-out equipment and opening its first showroom—and to suitably compensate its owners. But company management realized a downside: even with all that time, effort, and cash flow, the company was more profitable in the years when it sold less work.
Rapid double-digit growth is a problem most business owners might envy. But be careful what you wish for. Most discover that fast growth is risky. A big danger is that management’s focus tends to be exclusively on sales, revenue, and new customer acquisition, meanwhile the operational side of the business, where in contracting the money is generated, tends to get short changed. Another and related issue is cash flow. Predictability, it goes by the wayside. “The ebb and flow of cash in, cash out gets more complicated as you grow,” writer Carla Young points out. “It doesn’t take much growth before your monthly expenses exceed your operating credit, and suddenly one bad sales month takes on a whole new meaning.”
Struggling To Keep Up
For a contracting business that’s growing rapidly, the problems that accompany rapid growth are almost always production problems. That is, the inability to fulfill (i.e., build) in a timely manner what the contract promises. Production problems become cash flow problems when jobs that haven’t been started, or completed, can’t be collected. Now you’ve spent time and money, but a half or a third of the bill remains out of reach because you can’t finish the job to collect the balance owed.
But more than that, the surge in demand throws all a company’s production and sales support systems out of alignment. Equipment wears out more rapidly, customer service diminishes, and the organization “becomes more segmented and bureaucratic,” notes Timothy Carter on Business.com.
“These things aren’t inherently bad, but if they happen all at once, they can radically change your culture, resulting in lower morale and a different vibe to your corporate atmosphere.”
Don’t underestimate the wear and tear on morale. That kind of sudden, speed up in sales and all the activity that surrounds it can stretch a company to the snapping point. Rapid business growth “can easily lead to stressed out employees, low morale, and fighting among the members of your previously unified team,” Forest Time points out. “If employees are asked to do more than they are capable of because the demands made of your business are suddenly skyrocketing, some of them may decide to leave, which will only increase the workload of those left behind.”
In effect, the company becomes its own pressure cooker. Somehow, some way, you’ve got to figure out how to find crews, order and pay for product, and install all those jobs to your company’s standards, meanwhile keeping the sales machine fired up so the fun never stops. You’ll almost certainly need more people, but with less and less time to attend to hiring, either you don’t get around to it or the chances of hiring the wrong ones go up.
For contractors, there’s another problem. Say there’s typically an eight-week lag time between contract signing and collection. With double the number of jobs, you may find that stretched from two months between signing and collection to, let’s say, four months. Will the customer who signs for a new roof on Feb.1 be willing to wait until June 1, especially if her roof’s totally shot and leaking? If the customer who buys a siding job in October still hasn’t heard in January from your production manager about scheduling the work, you might find your phone ringing and someone on the other end of the line wanting her deposit back and eager to give you an earful. Then there are the competitors, always aware, who may use your growing lead-time against you in the sale. “Yeah, they do good work but it takes forever to get a job scheduled. Whereas we can start your job two weeks after tomorrow.” So the momentum you’ve built in sales suddenly starts to slow.
And then there’s managing the money.
Brian Hamilton, chairman of financial information company Sageworks, says in an article in Inc. that when a business is smaller, an owner can track how things are balancing out, or “how expenses are stacking up to sales.” But, he says, “Once you get to a certain sales range, above $5 million or so, it’s very hard to keep track of your financials in your head.”
What can happen is that expenses exceed collections. One solution is to get payment terms from suppliers. “However,” notes a blogger at Commercial Capital, “this solution can be difficult to balance. Clients could unexpectedly decide to pay slowly or suppliers could start demanding faster payments. And if this scenario happens, you’ll be exactly where you started.”
Contractors, of course, aren’t the only businesspeople facing this problem. And business experts offer many solutions for avoiding it. “To keep cash flowing, anticipate the cash crunch with a realistic plan that accounts for delays in the collection of receivables,” writes Elizabeth Fels at the site BusinssKnowHow.com. “Prepare a back-up plan for raising cash from personal sources or through a pre-approved line of credit from your bank.”
Other suggestions are to build, and when necessary dip into, a healthy cash reserve. More than that, it’s critical to get back to a healthy profitable state when expenses exceed collections. “If your business is losing cash, it’s essential to uncover the cause of any losses and address them as soon as possible. Possible solutions to becoming profitable may be to increase your prices, increase sales or gain better control over your expenditure,” notes a blogger at accounting software supplier FreshBooks.
So does this mean you should stay small, or pass up new product opportunities?
Not at all. It means planning and executing a strategy that enables you to grow your top line in double digits without significant disruption to cash flow, customer service, or operational efficiency. Have a budget for new hires in the key areas they’re most needed, which, in addition to production management, will likely be accounting and admin. And don’t let that swollen top line number become a swelled head.
“Expansion may involve handing over some of the day-to-day operations to someone else,” writes Avi Bendetsky, at Inside Small Business. “However, it’s important to keep your finger on the pulse of your company. When you are expanding, be sensitive to lapses in your leadership skills.”
Another thing it could also mean is “leveraging the right technology to help you manage your business growth,” says a blogger at Micronet. “The right technology will enable you to efficiently and effectively serve your customers without overworking your staff, manage cash flow, and create a long term plan for sustainable growth.”
In the case of that company breaking the $5 million mark only to have an unprofitable year, the lesson was to add office staff so as to take many of the administrative tasks away from its overtasked production manager. The owner, in reflecting on the year, says: “The main reason we didn’t make as much as we should or could have is that some of our processes were not being followed.” The company, he explains, had over time developed excellent systems for managing its core product, but, with siding, “because it was so new and the growth was so fast, it was basically ‘get the work and worry about profitability later.’” He says that in the last few months “we recognized the problem and fixed it.”