Survivor Style

By Dan Light as featured in Construction Today

In tumultuous times, leadership skills could be the guiding light to steer your business out of the storm.

Just as basically healthy individuals recover more quickly from illness, so, too, do healthy businesses recover from a few bumps in the road, such as an economic downturn. Among the retrospective measures that reflect the company’s health are items on the balance sheet and income statement, including cash flow, net profit, growth rate, productivity and return on investment rates. Unfortunately, by the time such historical data indicate symptoms of trouble, it may already be too late to reverse the condition. What owners really need is real-time information that lets them exert control and steer the company, according to a business plan, toward a predetermined profit. Owners who only look at historical numbers may be in the eye of a hurricane, unaware that it is tearing the business apart around them.

Storm Clouds Gathering

Entrepreneurs often believe that if they practice their craft skillfully and flawlessly, the money will follow. Up to about $1 million in revenues, this entrepreneurial spirit will carry them through. After that, a company that relies exclusively on technical capability is headed for trouble.

One of the first storm clouds appears on the horizon when the owner hires office help without much forethought or planning, let alone creating an organizational structure first. Tasks are handed off to family members or friends who may or may not be qualified for the job. Functions and priorities become blurred and the ship starts veering out of control. Rather than focusing on A and B lists of critical responsibilities, the owner wastes time handling items on the C list, which really should be delegated to someone else’s A list. In short, the owner works in the business rather than on the business. No time remains to plan the company’s growth or establish guiding lights, such as working capital requirements.

Blurred roles and responsibilities are exacerbated by unclear processes, which further put the company at the mercy of chance. For instance, no one—not even the owner—knows the entire process of producing an order. Several computers and people are involved, and much paperwork is generated. No contributor, however, knows the complete path or the roles of staff members to the right or left. As a result, resources are wasted, and once cash flow problems manifest themselves, the hurricane is already blowing.

Controlling the ship becomes even more challenging when a technically proficient, but financially unskilled business owner confuses profitability, return on investment and cash flow. A company can show 10-percent profitability and yet be in Chapter 11. How is this possible? Say, for instance, the company has invested $1 million to purchase a factory in China to manufacture shoes. After the first year, the profit and loss statement shows a 50-percent net profit, but the plant only made 100 pairs of shoes. It would take millions of years to get a return on investment.

The storm clouds become really ominous when profits are cut in half by taxes. Owners often believe that tax planning is about not having to pay taxes. At the advice of their CPA, they spend more money or purchase equipment to avoid showing a profit, which then causes cash flow shortages. They don’t realize that tax planning is really about establishing the most appropriate legal structure for the business so money can be allocated to pensions, incentive programs and other well-planned pockets rather than going to the IRS by default.

Ineffective use of technology tools further limits control and throws the ship off course. QuickBooks and similar programs in use at construction companies are usually set up to function at less than 10-percent capacity. In fact, QuickBooks in its default state is designed for retail stores, yet many contractors use it out of the box. They don’t customize it with macros, spreadsheets and tools for budgeting and forecasting. Some companies have outgrown QuickBooks because it cannot handle multiple purchase orders per job, complex change orders, over-billings, under-billings and variance reports.

Finally, the economy, regulatory agencies and the dichotomies of bickering governments add thunder and lightning, and now the company is totally at the mercy of the weather. When the owner finally receives the monthly financial reports, the first reaction is usually to throw money at the hurricane, again without forethought or planning. It’s not unusual for a $3-million business to “invest” $10 million within three years in a hurricane—without a destination or map.

Course Control

So, what do owners need in order to steer their ships clear of hurricanes? The first necessities are a purpose, a destination and a charted course. They then need accurate, real-time reporting to stay on track or readjust course when necessary. To set goals and make decisions, they need a dashboard of leading key indicators that show the big picture and real-time details.

In sales, for instance, leading metrics are:

  • Numbers of sales calls/contacts per day and per week;
  • Number of sales appointments set per day and per week;
  • Number of sales proposals or job bids developed per week;
  • Number of sales orders signed per week; and
  • Number of days from the sales call to signed customer order.

In operations, leading metrics may include:

  • Number of hours worked per week versus hours quoted on a job;
  • Number of overtime hours;
  • Quality metrics used in inspection at the conclusion of a job; and
  • Number of days it takes to invoice a completed work order.

In finance, leading key indicators include:

  • Weekly cash on hand;
  • Days receivable outstanding; and
  • Days payable outstanding
  • Number of days from completed work order to customer invoicing.

Accurate, real-time information comes from maximally utilized software that is appropriate for the size of the business (QuickBooks, Timberline, MasterBuilder, etc.). Some of the often overlooked but essential features include:

  • Job cost modules, whose functionality depends on getting accurate information from the field through a closed-loop communication system.
  • Forecasting modules. One of the most important key indicators is a six-week cash forecast, because it leaves 45 days to chart an alternate course when the first cloud appears on the horizon.
  • A closed-loop purchase order system. Don’t wait until the bill arrives to discover how much was spent on materials.
  • Flash report capability. For example, QuickBooks can send automatic daily flash reports to the owner, providing critical information for captaining the shop.

No one cares about the business like the owner, so he or she has to set parameters, establish profit goals, control capital requirements and make proactive decisions around them. Remember, control depends on measurement, and accurate measurement depends on accurate, real-time information on the critical variables that drive the business.

Leaders of Tomorrow

Owners of troubled businesses often believe they have no money to fix the problem. Trapped in a hurricane, their only solution is to work harder, not smarter. Actually, the cash flow shortage is not the problem, but merely a symptom of a lack of control. Controlling a business and returning it to health depends on a business plan, a bull’s eye to aim at predetermined profit and critical variables and a dashboard with key indicators that show where the business is headed.

With these components in place, owners will have the critical information to make tough decisions and the hard data to qualify for loans or government assistance. They are poised to survive and thrive in these tumultuous times and become the leaders of tomorrow.