Hello, and welcome to the Service Contractors’ Business Tape CD of the Month. This monthly cassette CD series represents yet another step in accomplishing Grandy and Associates’ vision of teaching contractors how to run profitable companies. Each month, a different national speaker from throughout the service and trades industry shares dozens of cost-reducing, profit-increasing ideas to help you become a more profitable company.
This month’s presentation is by Brandon Jacob, founder and president of a financial consulting company called Contractors’ Financial Opportunity. Brandon is a graduate of Texas A&M University and brings his 15 years of valuation analysis and acquisitions to contractors across the country. As you might have guessed, Brandon has worked with some of the best as well as some of the worst companies in the industry.
This month, Brandon is going to share with us the top 21 reasons for business failure. Pay close attention as Brandon shares with you why most businesses fail. If you will pay attention to what he shares, it may just help your company become a lot more profitable.
Over the last decade, I have analyzed hundreds of contracting businesses. In doing so, I have been inside some of the most successful businesses in the country as well as some of the biggest disasters. Today, I would like to share with you some of my knowledge in the form of a list of 21 mistakes that are commonly made by owners of contracting businesses.
These mistakes, if made inside of your business, will prevent you from being successful. Hopefully, by going over this 21-item list, you might avoid these pitfalls. Number one, failure to understand the responsibilities associated with being a business owner.
Do you have what it takes to be a business owner? Do you understand the responsibilities that come along with the title owner or shareholder? Many employees fail to realize that the responsibilities of being an employee are far less than that of an owner. As an employee, you show up to work each day prepared to perform a specific task. Be it as a technician, manager, or salesman.
At the end of the week, a paycheck magically appears with no questions asked. As an owner, your responsibilities extend well beyond one job. As an owner of an HVAC or plumbing business, you are not only responsible for the management of your employees, but also for making sure that the sales, marketing, finance, and accounting functions are working properly.
At the end of the week, owners are the last ones to receive a paycheck. Many contracting businesses start when a technician envisions the mounds of money that can be made as an owner. In many cases, a technician incorrectly concludes that the owner is rolling in dough.
After all, look at all the money the technician builds for the company. The truth is that all owners should be making a decent return on the huge risks and responsibilities that come along with owning a business. Understand that in order to be a successful business owner, you must gain at least a working knowledge in management, sales, marketing, finance, and accounting.
Failure to understand this responsibility will lead to disaster. Number two, failure to seek advice and assistance from outside resources. Knowledge of management, sales, marketing, finance, and accounting is a lot for anyone to know.
Not to mention, you must know a thing or two about the technical side of our business. If you lack in any one of these areas, you are not alone. Give yourself a break.
No one is born with all this knowledge. The good news is that there are ways to gain the knowledge in areas that you are lacking. Are you a little weak in understanding what it takes to market to your customers? Or were you sleeping when you took that accounting class in high school? Don’t worry.
Take a class. Hire a consultant. Seek outside professionals and attend seminars.
There are resources that exist for all areas mentioned above. Very few owners have started their business with a complete understanding of what all it takes to be successful. If you waited until you knew everything, you would never start.
However, if you find yourself completely lacking in a certain area, don’t avoid the matter and hope for the best. They say a chain is as weak as its weakest link. If you have a weak link in your organization, seek help from outside sources.
Number three, failure to track and understand field technicians’ performance. Do you know what your field technicians are doing with every call that you are sending them on? Who is your best technician? Who is your worst? What was your average service ticket last year and how many service calls did you run last month? These are all questions that an owner should be able to answer about his business. In addition to the monthly financial statements, tracking and understanding your technicians’ performance is how you keep score.
If you are not keeping score, you have no idea if you are winning or losing. It’s kind of like driving down the road at night in an unfamiliar part of the world with your lights off. Chances are you’re going to hit a tree.
Your technicians’ efficiency will make or break your business. If you do not track what each and every technician is doing, you will never know where to train, where to make improvements, or what technicians to fire. So they can go destroy someone else’s business.
Track your technicians’ performance or brace for collision. Number four, failure to charge for your services and not implement flat rate pricing. Flat rate pricing is not an option.
It’s a must. To remain profitable today, a service business must charge labor rates that would make customers feel like they are being robbed. And many consumers are completely clueless about the expenses associated with running an HVAC or plumbing business.
And all they can do is equate your hourly rate to that of their own, their spouse’s, or whomever. Wow, $150 an hour. I wish I could get paid that.
Plain and simple, flat rate prices enable you to charge the labor rate that you must charge in order to be profitable. Remaining on time and material is a mistake and it will prevent your business from achieving a gross profit necessary to guarantee success. Number five, failure to understand the cyclical nature of the HVAC business and to an extent the plumbing business.
In the morning, the sun will come up and at night it will go back down. Bet on it. Another safe bet, the summer in your town will be hotter than the winter and you will sell more HVAC equipment when it is hot.
The HVAC business is cyclical. The cycles vary from region to region, but all HVAC businesses will experience the busy season and the slow season. Accept it.
Prepare for it. Survive it. A successful contractor recognizes this fact.
Why be surprised that no one is calling for a new condenser in February when it is 35 degrees? How well you manage your business during both the busy season and the slow season will further your chances of success and lessen the chances of failure. This not only means limiting expenditures and cash flow planning in the slow season, but also making sure your business is as profitable as possible through the busy season. This goes for plumbers as well as every region has periods that are busier than others.
Finally, instead of complaining about yet another cool March, focus your mental energy on a new marketing program to attract customers during this pre-busy season period. March will never be as strong as June, so stop dreaming. Number six, failure to build a service agreement base.
The HVAC business is cyclical, and if that ever changes, we will have more important things to worry about other than selling HVAC equipment. Your ace in the hole is service agreements. Service agreements enable your business to not only maintain a level of activity during the slower seasons, but also enables your technicians to offer customer upgrades and services prior to the cooling and heating seasons.
Finally, customers under service agreements will not stray too far and call another competitor when it is time for demand service. Number seven, failure to diversify advertising. If your entire advertising and marketing campaign begins and ends when the Yellow Page representative leaves your office, listen closely.
It’s not uncommon for HVAC and plumbing businesses to spend 10 cents of every dollar billed on advertising. Not too long ago, it seems that many successful businesses spent all that on Yellow Pages. I am not advocating leaving the Yellow Pages, but think about it.
When was the last time you dug out the book when you needed service? Pick your advertising carefully and allocate a portion of your budget to new advertising. What works in one region may not be so great in another. A combination of two or more of the following should be considered.
Yellow Pages, direct mailers, newsletters, newspaper, community publications, television, and radio. Hoping and waiting that someone will pick up the Yellow Pages in October and call your HVAC business or expecting someone to pick your plumbing business out of the 50 choices in the Yellow Pages is like dreaming of winning the lottery. It’s not likely to happen, but it sure is fun to sit around and think about it.
The difference is, while you’re hoping and waiting, your business is failing. Number eight, failure to focus on your core business. Why do so many contractors feel that they will be more successful operating in both new construction and service markets? No one has 100% of their local market completely locked down in any one segment, so why feel the necessity to branch out and become involved on two fronts? If your focus is residential service and replacement, be the best residential service and replacement contractor in your market.
Leave the new construction market to your friend who owns a new construction business. Another mistake, there are countless HVAC contractors contemplating opening up a plumbing branch. Typically, it’s because so many customers ask if they do plumbing.
Although this low-hanging fruit may appear too good to pass up, think about the lost opportunities in your core HVAC business. Develop a referral partner to hand these plumbing jobs to and hope in return this referral partner flips you all his HVAC leads. Number nine, failure to build a reliable resource network.
Are you out there operating totally alone without any help? Do you speak to your CPA, attorney, and insurance man more than once or twice a year? Do you associate with successful contractors in different lines of work in your market? Failure to establish a reliable resource network will put your business at a distinct disadvantage as you will pass up on excellent business advice that is so hard to come by when you operate your own small business. This goes well beyond seeking business advice. It involves establishing relationships with those people to help you successfully stay in course on a day-to-day basis.
Number ten, failure to set goals, properly plan, and budget. No one looks forward to planning and budgeting. How are you supposed to predict what is going to happen next year anyway? First off, what do you want to achieve from your business next year? Determining what you hope to achieve is setting goals and setting goals is the first step in planning and budgeting.
Secondly, how do you plan to achieve these goals? Planning how to achieve these goals is planning. Estimating what your business will earn by reaching these planned goals is budgeting. Without fresh goals, plans, and a budget, your business starts the new year aimlessly and ends up wherever.
If you don’t know where you’re going, how do you know when you get there? With a goal, plan, and budget, you have something to keep you on track and something to celebrate or study for improvements at the end of the year. In addition, while budgets are being created, the business owner is forced to address certain decisions that are often put off during the year. Last but not least, it is amazing how much owners learn about their businesses when budgeting.
These discoveries can be the difference between success and failure. Number 11, failure to receive monthly financial statements. Operating without monthly financial statements is like hiking without a compass.
You might not get lost. However, if you do, the consequences will be severe, and by the time you figure out that you are lost, it will be already too late. At the very minimum, you must have an income statement and a balance sheet prepared for your business at the end of each month.
And the time frame in which these financial statements are completed must be shortly after the month ends. If you are not generating timely financial statements, or if you are generating these financial statements but not taking the time to study and understand them each month, you are not managing your business, and you will find yourself lost in the woods. Number 12, failure to implement financial control and discipline.
Financial control and discipline is about establishing procedures to ensure the financial aspects of your business are managed continuously, accurately, efficiently, timely, and consistently. Failure to implement financial control and discipline will lead to inaccurate financial statements, which will then be useless as management tools. An additional byproduct of poor financial control and discipline is office manager and bookkeeper fraud.
We will discuss these points later in the presentation. Number 13, failure to understand your income statement and financial ratios. It’s just not enough to generate an income statement every month and not look at it, or look at it and not understand what it says.
You don’t generate financial statements simply to tell the IRS what taxes you owe. An income statement is a tool used to operate a successful business. Just like tools, if you do not understand how to use them, you should take the time to learn how to do so.
Small businesses, especially small HVAC and plumbing businesses, are blessed with rather simple and basic financial statements. Understanding these basic financial statements along with basic financial ratios is critical to a successful business. Basic financial ratios include an understanding of percentages to revenue, also known as your margins.
Without understanding your business’s margins, you are doomed. You do not need to have the background or knowledge of a CPA or Wall Street investment analyst to successfully run a small service business. But not understanding financial statements and ratios leads to business failure.
Number 14, failure to understand profits and cash flows. Profits and cash flows are two different things. Profitable businesses, both large and small, run out of cash and go out of business all the time.
Unfortunately, these businesses are typically growing and everything appears to be in good order. Why is this? Your income statement, which tells you how profitable your business is, does not take into consideration certain important cash flow items such as cash not collected or your accounts receivable and cash used to pay debt. A profitable business that carries a lot of accounts receivable and services a lot of debt can run out of cash very quickly.
Without understanding the difference between profits and cash flows, you may find yourself in this predicament. Understand profits and cash flows and do everything in your power to create a positive cash flowing business. Number 15, failure to understand the balance sheet.
Just like the income statement, if you generate a balance sheet each month and fail to understand what it says, it really is useless. Whereas the income statement tells you how profitable your business is, the balance sheet tells you about the overall health. Do you have too much debt? Are you building equity? What does your accounts receivables and payables look like? An outsider familiar with how financial statements work should be able to pick up the most recent balance sheet and learn everything there is to know about your business.
You should be able to do the very same thing. Your financial statements are your business’s report card. Without studying them, you will not know if you are passing or failing.
Number 16, failure to control excessive personal expenditures. The beauty of small business ownership is that you get to do what you want to do within your own business. To many, running non-business expenses through their business is done to lower the amount of earnings for tax purposes.
Another term for this is tax fraud. Although the risks of being caught are slim, some business owners find themselves living out of the business. By doing so, their businesses are sucked dry of the necessary cash to continue to replenish assets and to grow.
Another unhealthy byproduct of such an ownership policy is the failure to fully understand what the business is capable of earning because the personal expenses cloud the overall financial picture. Finally, an IRS audit can be a very unpleasant experience under such a scenario. Resist the urge to treat your business like a personal checking account.
Treat it like what it really is, a real business. Number 17, failure to understand the need to reinvest capital and to replace assets. If you are running a successful business, chances are it generates excess cash.
With that excess cash, you can either raise your salary, bonus employees, run personal expenses through the business to remove the cash, which is unadvised, or leave it in the business and reinvest in the assets that make your little cash machine operate. Small businesses are machines, and like all machines, they consist of parts. These parts wear out and need replenishing.
HVAC and plumbing businesses must constantly reinvest in vehicles and small tools. To simply take a salary out of your business without leaving capital in place for reinvestment is slow death to a small business. Eventually, you will have a broken down machine that is no longer capable of generating the profits and cash that is expected.
Ultimately, the business will become worthless. Number 18, failure to understand gross profits of all business segments. Gross profits are defined as revenue less direct costs.
Gross profits tell you how much profits the business is earning before overhead costs. You must have a sound understanding of what to expect in terms of gross profits from each business segment, and you must know what this gross profit is on a monthly basis. If you are operating a business with gross profits that are too low, there is no way to make up by cutting overhead.
Eventually, the cuts that you do make to overhead will destroy your ability to generate profits, and the cycle will manifest until your business is destroyed. This also relates back to flat rate pricing. There is no way to overcome charging too little for your services.
Number 19, failure to safeguard against fraud. Small business owners have to employ people to perform various tasks. Unfortunately, employees will often steal from a business.
As a business owner, you do not work hard to build a customer base, book service calls, and collect from customers only to have a dishonest employee steal what the business has earned. Failure to safeguard against fraud can have a devastating effect on a small business. There are numerous ways in which a dishonest office manager or bookkeeper can steal money, and only one way to prevent the problem is to establish safeguards.
Establishing safeguards, among other things, involves separating certain functions such as cash receipts from cash deposits, retaining control of certain administrative functions such as the receipt of bank statements, and finally, remaining involved in the financial aspects of the business, receiving and understanding monthly financial statements. Number 20, failure to purchase key man life insurance. Let’s face it, most small contracting businesses rely on you, the owner for survival.
Without the owner’s everyday presence, the business rapidly and quickly starts to unwind. How long can your business survive should you become incapacitated or worse, killed in an unexpected tragedy? Stop a minute and consider the horrible outcome of such an event, and then consider a key man life insurance policy. Number 21, failure to formulate a buy-sell agreement or an exit plan.
Successful businesses start, grow, and are sold. Selling your business enables you to realize a payoff for your hard work when the day comes to move on. Many business owners fail to give the planning of their exit any real thought and find themselves at a tremendous disadvantage when it comes time to retire or another unexpected life event takes place and forces them to sell.
Planning your exit will enable you to address the issues that may prevent your business from building value and will also help you set goals so that when an opportunity to exit appears, it won’t be squandered. If you are in business with a partner, regardless of whether it is a family member or not, eventually the partnership will run its course and one partner will find himself buying out the other. When partnership tensions are high, it is no time to discuss methods of business valuation and other steps needed to be resolved before the partnership can successfully be wrapped up.
While your relationship with your partner is positive, put together a buy-sell agreement so that when the relationship is strained, you already have a course of action. Many HVAC and plumbing businesses are run into the ground as partners negotiate how one will buy the other out. In conclusion, I hope you are able to take away from this list an idea of the mistakes to avoid.
Hopefully you are not making too many of these mistakes, but if you are making one or more, take the time to make the adjustments. This list was designed to help pass on to you a decade of my knowledge so that your business may be successful. Thank you for listening.
As always, we welcome your feedback on each month’s presentation. Feel free to give us a call with your comments, or if you prefer, you may fax or email our office. As a reminder, our 3-Day Basic Business Boot Camp continues to help contractors learn how to run profitable businesses.
For more information on our ProfitMax software and or our 3-Day Basic Business Boot Camps, simply call or write Granding Associates or check us out on the web. The address is www.grandingassociates.com. The address is the same as in the past, but the website has been totally redesigned in terms of its content. You can now order online, view boot camp locations, and even sign up for a class online.
Take a look as you have time. It might just increase your bottom line profit a bit. The Service Contractors Business Tape of the Month is produced and distributed by Granding and Associates.
If we can be of service to you, give us a call on our toll-free line at 1-800-432-7963. Until next month, remember, invest your time and invest your money in those things that will reproduce.
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